Introduction — Economics STD 12 Humanities & Commerce — Question

The Great Depression was a severe economic crisis that started in the year 1929. It was the longest and deepest and most widespread depression of 20th century. In 21st century, the Great Depression is commonly used as an example of how far an economy can decline. It originated in the United States of America when the stock market crashed which results in the beginning of a decade of high unemployment, poverty, low profit and deflation and it gradually spread to other countries of the world. The worldwide GDP fell by 15% as compared to less than 1% during the Great Recession in 2008-2009. The main cause behind this crisis was the fall in aggregate demand due to under consumption and over investment. Aggregate supply was greater than aggregate demand which resulted into depressing activities. Due to under consumption and over investment the stock of finished goods started piling up, which resulted in low price level and consequently the low profit level. The money in the economy was converted into unsold stock of finished goods that lead to an acute fall in employment and hence income level fell drastically. The demand for goods in the economy was so low that the production was lowered leading to the unemployment. In USA, the rate of unemployment increased from 3% to 25%.
The Great depression has its own implications and importance in economics, as it leads to the failure of the classical approach of economics. Those who believed in the market forces of demand and supply, paved the way for emergence of the Keynesian approach. It was this incident that provided the economists with sufficient evidence to recognize macroeconomics as a separate branch of economics.
The cause and effect relationship of the Great Depression can be summed up in this flow chart.
Low demand → over investment → low level of employment → low level of output → low income → low demand.