Great Depression and the Great Recession, Essay Example

Compare the 2008/2009 recession to the Great Depression. Specific comparisons must be made on all the following data:

What major even pulled the U.S. out of the depression?

World War II was the major event that pulled the U.S. out of the second world war. This is because the war depended heavily on industries. All production industries became crucial in sustaining the U.S. army and its advancements on the battlefield.

What major monetary mistake was made during the Depression as indicated by the above data?

When an economy experiences a downturn, it is essential that money be injected into the financial system so as to boost consumer spending and investments. During the Great Depression, the Fed failed to make us of their reserves, increasing money supply by 17%.

Quantity Equation – has this theory worked? Why or why not?

During the Great Recession, the quantity equation has failed to work. This is because this theory is based on the assumption that an increase in money on the economy would lead to the full employment of all resources available to the economy. However, this was not the case in the great recession. Some of the money that was injected into the economy was used to employ resources while most of it was not.

Reserves, bank lending, and the multiplier, is the process/flow working as it normally does?

The monetary process/flow is not working as it normally does. This is because since the Federal Reserve provided a great deal of liquidity to boost expenditure and investments, bank lending has considerably reduced due to fears of underlying systemic errors. The multiplier has also failed to work as expected owing to the great disparity in wealth distribution.

What are the longer term concerns regarding recent money supply growth?

The money supply growth that has been experienced raises concerns on the long-term implications this increased supply of money would have on the value of the dollar. Increase in the number of dollars within the system considerably reduces its value, relative to other competing currencies.

What does the Fed eventual exit strategy refer to? What specific Fed actions will it likely include?

The Fed’s exit strategy refers to a plan for the Fed to gradually stimulate and influence the economy to the point of equilibrium. The Fed will gradually raise the interest rates paid on excessive reserves so as to normalize interest rates in the short-term.

What are the risks to the economy associated with the eventual exit strategy?

One major risk associated with this exit strategy is the possibility of the failure of the economy to adjust to the changes in interest rates at the same rate as these interest rates change. This may cause a situation where borrowing would become too expensive hampering investment and economic growth.