Question

Using the aggregate demand and aggregate supply model, a decrease of what curve is by itself consistent with the changes in prices and output that occurred during the onset of the Great Depression?

Answer 1

The correct answer is aggregate demand.

Step-by-step explanation:

On the onset of the great depression, the stock market crash led to a reduction in consumer confidence. As a result, the investment in capital market declined. This caused the aggregate demand curve to shift to the left. This further caused nominal wages to increase. As a result, the aggregate supply increased.

The reduction in wealth affected the consumer confidence adversely causing a further reduction in consumption and thus decline in aggregate demand. When the government revenue declined due to a fall in income and consumption, the governments increased tax rates to compensate. Higher taxes further led to a fall in disposable income causing consumption and aggregate demand to decline.

The rightward shift in the aggregate supply curve because of a fall in nominal wages failed to increase real GDP because of continuous reduction in aggregate demand.