Describethe Great Depression of 1929.

The GreatDepression was a severe economic crisis that started in the year1929. It originated in the United States of America with the crash ofthe stock market and gradually spread to other countries of theworld. The main cause behind this crisis was the fall in aggregatedemand due to under consumption and over investment. Due to underconsumption and over investment the stock of finished goods startedpiling up, which resulted in low price level and consequently the lowprofit level. The money in the economy was converted into unsoldstock of finished goods that lead to an acute fall in employment andhence income level fell drastically. The demand for goods in theeconomy was so low that the production was lowered leading to theunemployment. In USA, the rate of unemployment increased from 3% to25%.

The Greatdepression has its own implications and importance in economics, asit leads to the failure of the classical approach of economics. Thosewho believed in the market forces of demand and supply,paved the way for emergence of the Keynesian approach. It wasthis incident that provided the economists with sufficient evidenceto recognise macroeconomics as a separate branch of economics.

The causeand effect relationship of the Great Depression can be summed up inthis flow chart

Low demand→ overinvestment → low level of employment → low levelof output → low income → low demand.

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