45 Great Depression vs. Great Recession

Deflation and the Great Depression vs. the Great Recession

In the Great Depression from 1929 to 1933, the price level fell by 22 percent and real GDP fell by 31 percent. In the 2008-2009 recession, the price level rose at a slow pace and real GDP fell by less than 4 percent. The 2008-2009 recession was much milder than the Great Depression for various reasons:

  • During the Great Depression, bank failures, a 25 percent contraction in the quantity of money, and inaction by the Fed resulted in a collapse of aggregate demand. Money wage rates and the price level were slow to adjust, resulting in huge decreases in real GDP and employment.
  • During the 2008 financial crisis, the Fed bailed out troubled financial institutions and doubled the monetary basis, which kept the quantity of money growing. Combined with increased government expenditure, the growing quantity of money limited the fall in aggregate demand, thus resulting in smaller decreases in employment and real GDP. (21)

The 2008–2009 Recession

At the peak in 2008, real GDP was $15 trillion and the price level was 99. In the second quarter of 2009, real GDP had fallen to $14.3 trillion and the price level had risen to 100. A recessionary gap appeared in 2009. The financial crisis that began in 2007 and intensified in 2008 decreased the supply of loanable funds and investment fell. In particular, construction investment collapsed. Recession in the global economy lowered the demand for U.S. exports, so this component of aggregate demand also decreased. The decrease in aggregate demand was moderated by a large injection of spending by the U.S. government, but it did not stop aggregate demand from decreasing.

Aggregate supply also decreased. The rise in oil prices in 2007 and a rise in the money wage rate were two factors that brought a decrease in aggregate supply. (21)


Icon for the Creative Commons Attribution 4.0 International License

Principles of Macroeconomics Copyright © by Lumen Learning is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.

Share This Book