This is a summary of Unit 17 needed for the course macroeconomics for the first year of the study economics and business economics in Utrecht. The summary is based on the book The Economy: Economics for a Changing World and includes illustrations from the book for clarification.
Unit 17 The great depression, golden age, and global financial crisis
17.2 The great depression, positive feedbacks, and aggregate demand
The Great Depression was a large-scale crisis US in 1929:
Pessimism about the future: investments declined on unemployment and the stock
market which caused fear in households, making them save more.
Failure of the banking system: Lower income meant loans couldn’t by payed. Causing
banks to close, and interest rates to increase, discouraging investments even more.
Deflation: Prices fell as goods remained unsold.
- Because debts were nominal, deflation increased their real value, this in
combination with lower income (such as by farmers) caused a crises, farmers
started producing more causing even more deflation.
- Purchased started to be postponed, because they would become cheaper.
17.3 Policymakers in the great depression
Fiscal policy in the Great Depression: There was little fiscal policy, the government tried to
save to repay their deficit which reinforced the downturn.
Monetary policy in the Great Depression: Real interest went up because prices were falling,
spending’s on buildings and consumer durables decreased sharply.
The gold standard was bad for the US during the Depression, when the dollar depreciated,
there was a huge gold outflow of the US.
17.4 The golden age of high growth and low unemployment
In 1948, capitalism saw a very low unemployment combined with a high growth. This caused
catch-up growth to the US.
Changes in policymaking and regulation.
New institutional arrangements between employers and workers, causing firms to
innovate.
Governments started supporting AD.
Unemployment benefits were introduced/automatic stabilizers.
Bretton Woods system: fixed exchange rates between countries.
17.5 Workers and employers in the golden age
The economic cycle of the golden age:
1. After-tax profits in the US were high.
2. Profits led to investment.
3. Investments and technological progress created more jobs.
4. Inclusive unions encouraged cooperation between workers and firms.
, During the late 1940’s and early 1970’s trade unions, employers and governments made
agreements in the postwar accord causing rapid growth.
17.6 The end of the golden age
In the late 1960’s the golden age ended, because people didn’t lose their jobs they started
putting in less effort, driving down profit rates. There became high stagflation which is high
inflation + high unemployment.
As more and more people went on a strike, postwar accords collapsed, as there was debait
Workers demanded more social services, making it hard for the US to maintain a budget
surplus. And because of war spending’s AD was unsustainably high.
1. Upwards shift in the wage-setting curve due to the collapse of the postwar accords.
2. In 1973 the oil price shock pushed the price-setting curve down.
3. The unemployment rate shifted to 7% (D)
Even though unemployment rose, the strong bargaining position of the workers (because of
strong unions) caused little wage decreases, meaning profits and thus investment were
lowered. Wages were above the wage-setting curve, into the firms cut.
The Great Depression was a demand-crisis because of problems with AD. The end of the
golden-age was however a supply-crisis, because supply problems lowered the profit- and
investment rate.
Normally, the Phillips curve says that high unemployment causes low inflation, but because
the curve shifted upwards due to the bargaining power, inflation and unemployment rose
together.
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