Question

2. a) People sometimes use the following saying to define recessions and depressions: ‘A recession is when your neighbours lose their jobs; a depression is when you lose your job’. What are some of the observations that make people call an economic downturn a depression rather than a recession?

b) Why might people who lived through the Great Depression have a different propensity to save than people who only remember the recent economic expansion?

Answer 1

2. a) A depression is a prolonged form of recession where a recession lasts for some months, a depression is for over a decade. Both are economic contractions with different levels of severity. An economic downturn for atleast two quarters or more is termed as recession indication while the same for an year or more signals depression.

b) During the great depression the propensity to save was very high among the people because there was unemployment at very high levels and production has stagnated, banks had low interest rates and demand for money was only for transaction purposes hence saving was a common phenomenon compared to a situation of economic expansion where propensity to save is much lower as investment is high because consumer confidence is high during expansion.