Question

During the time leading up to the Great Depression of the 1930's in the United States, Europe was already in substantial From impacting the United States the Federal Reserve Banks took steps to seriously restrict state of depression. In an effort to keep this European depressiorn cial capital (money) from flowing from the U.S. to Europe. This resulted in restrictions the supply of money in Europe. Some economists have argued that this deepened the European depression. IF the economy operated as the Classical economists thought, what impact would these actions have had on the European economy? In other words, from a classical perspective, did these actions by the US Federal Reserve Banks worsen the European depression? (Just briefly explain this without providing any underlying analysis.) a. Substantiate this by tracing the impact of decrease in M through the classical model noting the impacts on the key variables of Y, N, W, P, W/P, r, I, G and T. Briefly explain how your result here confirms your statement in answering 2.a b.

Answer 1

Answer 2 (a): The Classical economists gave tremendous importance on the movement of capital among the countries as an important variable which determined the economic development of all countries who are involved in economic transactions. In the case here, during the great depression of 1930’s , US Stopping the movement of capital from US to Europe was a case that did hurt the European economy in a bid way. If we go by the Classical economic explanations, since the European nations were already in a state of depression, they required a higher influx of capital in to their markets to some how levitate their dying prices. Here, the capital from US would have largely been beneficial for the UK markets.

                               Answer (b) : Since Money (M) was stopped from moving in to the European markets, all the other variables like Y ( Demand) , N ( Supply), W ( Wage), P(Productivity), etc. do not find the right impetuous or financial aid to support their rise. All these factors are largely dependent on the availability of capital to grow. Now, since there is no capital available, these variables do not get the required push that they need to get together and working as normal. All these factors therefore had a large impact on the underdevelopment of the European countries during the depression period, and the non-financial aid from the US increased the depression.