Question

1. What are the 2 chief causes of Cost-Push inflation?

2. Explain in detail why the Great Depression was so bad as compared to the Great Recession of 2008-2009 .

Answer 1

1. The two main causes of cost-push inflation are:

An increase in the money wage rate

An increase in the money prices of raw materials (especially oil).

2. During the Great Depression, banks failed and the quantity of money fell by 25 percent. – The Fed stood by and took no action to counteract the fall of buying power, so aggregate demand collapsed. Because the money wage rate didn’t immediately fall, the decrease in aggregate demand caused a huge decrease in real GDP.

In contrast, the 2008-2009 recession saw the Fed bailing out of financial institutions and doubled the monetary base. The quantity of money kept growing. Basically, the combination of the Fed’s policies to continue the growth of money and an increase in government expenditures prevented a large decrease in real GDP