Macroeconomics

1 1-3

The Great Depression

Now that we have developed the model of aggregate demand, let’s use it to

address the question that originally motivated Keynes: what caused the Great

Depression? Even today, more than half a century after the event, economists

continue to debate the cause of this major economic downturn. The Great

Depression provides an extended case study to show how economists use the

IS –LM model to analyze economic fluctuations.

1

Before turning to the explanations economists have proposed, look 

at Table 11-2, which presents some statistics regarding the Depression. 

These statistics are the battlefield on which debate about the Depression

takes place. What do you think happened? An IS shift? An LM shift? Or

something else?

326

|

P A R T   I V

Business Cycle Theory: The Economy in the Short Run