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Unit Two: Exercise Twenty-One: Causes And Consequences Of The Great Depression ANSWER KEY Refer to the Student Workbook p. 67-70 How did the following factors cause the Great Depression? 1. Overproduction The industrial capacity of the U.S.A. had expanded beyond the ability of the consumer to consume. As factories closed, unemployment increased, which further reduced demand. 2. The Stock Market Investors in the stock market engaged in excessive speculation and too much buying on margin. They were buying stocks on borrowed money, with the hope that the stock would rise in value so that they could re-pay the loan. When Wall Street collapsed in October 1929, the flow of American money to other countries was further slowed. 3. Economic Nationalism and Tariffs The United States passed two tariff bills, the Fordney-McCumber Act and the Smoot-Hawley Tariff Bill, which caused other countries to take protectionist measures and raise their own tariff barriers. These actions made the problem worse by restricting trade even further. 4. International Debt after the First World War When the United States lent money to foreign nations after the First World War, those nations often depended on their ability to sell their products to the U.S. to raise the currency to repay those loans. When the U.S. led the protectionist (tariffs) movement, international trade was reduced and countries lost the ability to repay their loans. Explain the following consequences of the Great Depression: 5. Unemployment As the Depression deepened, unemployment worsened. High unemployment (approx. 25%) reduced demand. The effects of unemployment were very severe because employment insurance and welfare payments were not yet in place. 6. Banking Failures As businesses went bankrupt, so did the banks, in a sea of bad loans. This in turn hurt depositors who lost their life savings. 7. Political Consequences Americans began to doubt the validity of the American dream. In countries like Germany the political system would not survive the Great Depression. 8. Change in Role of Government Government would have to take a more active role in caring for the poor. Unemployment insurance, sick benefits, child benefits, and welfare were developed during the Depression. Laissez faire was dead. Governments began to manage the economy through tax policy, monetary policy, and fiscal policy. Hazelmere Publishing. Permission to copy is for classroom use only and specific to site.