Compare and Contrast the Great Depression with the Recent Great Recession - Essay Example

Depression affected the economic sustainability of many nations which led to a steep increase in the unemployment rates along with the frequencies of bankruptcy in financial as well as agricultural sectors. According to various economists, the major causes which led to the great depression related to the fluctuations of stock markets along with divestments in the agricultural sectors. It is worth mentioning that according to the perceptions of various researchers, the breakdown of stock market in the year 1929, popularly known as Black Thursday, is one of the significant causes of great depression.

It caused countless side effects, such as increased rate of poverty, infringed living standard, declined real GDP, turbulent financial sector, and highly unstable political system. In addition, the export-import activities of the nations were also hampered that significantly reduced the revenue earned through foreign trade and thus resulted in a drought condition of the economies (Michl, T. R., “Macroeconomic Theory”). On the other hand, a great recession is the cause of economic decline.

The major causes for recession can be identified as the imbalanced distribution of resources, relaxation in the mortgage standards, and distortions in real estate market. Moreover, due to inflation, the oil prices also increased to a large extent all over the world leading to recession (Michl, T. R., “Macroeconomic Theory”). The AS-AD model depicts the relationship between Aggregate Demand (AD) and Aggregate Supply (AS). In a general AS-AD model, the determinants are Short Run Aggregate Supply Curve (SRAS), Long Run Aggregate Supply Curve (LRAS) and real GDP.

In this model, price level is described on the vertical axis and the real GDP on the horizontal axis with the intention to depict the changes occurring in the two aspects in relation to the changes of AS and AD (Michl, T. R., “Macroeconomic Theory”). Figure 1: AS-AD Model in General Terms Source: (Michl, T. R., “Macroeconomic Theory”). During great depression, a simultaneous decrease of AD, LRAS and SRAS curves can be witnessed. When the stock market crashed in 1929, it resulted in decline of real GDP, price level as well as sharp movement of LRAS and SRAS curves.

In the below figure, it is clearly shown that due to depression, LRAS0 shifts downward to LRAS1,similar to the SRAS0 and AD0. Consequently, the price level also shifts from original P0 to P1 and real GDP from Q0 to Q1. This reveals that every component tends to be downward slopping during great depression which creates a negative impact on the price level as well as on the real GDP (Michl, T. R., “Macroeconomic Theory”). Figure 2: AS-AD Curve during Great Depression Source: (Michl, T. R., “Macroeconomic Theory”) On the other hand, during great recession, Aggregate Demand (AD) curve slopes downward on the SRAS curve which tends to decrease the price level and real GDP, resulting in contractionary gap between LRAS and AD causing a recession in the economic environment.

In the figure below, it can be witnessed that due to recession AD0 shifts to AD1 quite sharply. As a result, the real GDP also falls from Q0 to Q1 as well as the price level (P) that shifts from P0 to P1 causing the contractionary gap (Michl, T. R., “Macroeconomic Theory”). Figure 3: AS-AD Model in Great Recession Source: (Michl, T. R., “Macroeconomic Theory”) On the similar context, the federal fiscal policy was also