Chapter 4R, Problem 13MCQ

To determine

To determine what type of shock was the collapse of wealth and business and consumer confidence in the time of the Great Depression.

Explanation of Solution

The collapse of wealth and business and consumer confidence during the time of the Great Depression was a negative demand shock as it reduced the number of money people had in hand which could be used to consume or invest in the economy. Therefore, option (c) is the correct option.

There is no supply-side element, in this case, therefore a negative supply shock cannot be the cause of the Great Depression. Thus, option (a) is wrong.

A positive supply shock would have affected the economy positively. But Great Depression was an event that lowered growth and employment. Therefore, option (b) cannot be correct.

A positive demand shock would have induced growth in the economy. However, Great Depression led to the opposite. Therefore, option (d) is incorrect.

A recessionary shock lasts for a few quarters, but depression lasts for years. Since a recession is a normal part of the business cycle it cannot cause a severe incident like depression. Therefore option (e) is incorrect.

Economics Concept Introduction

Shocks in an economy can be both the demand side as well as supply side. Demand side shocks were the shocks that took place during the times of the Great Depression, which caused a recession in the economy.

The collapse of wealth and business and consumer confidence during the time of the Great Depression was a negative demand shock to the economy.