- The Causes Of Economic Instability - Free Economics Essays The Causes Of Economic Instability

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The Causes Of Economic Instability

Many believe erroneously that the stock market crash that occurred on Black Tuesday, October 29, 1929 is one and the same with the Great Depression. In fact, it was one of the major causes that led to the Great Depression. Two months after the original crash in October, stockholders had lost more than $40 billion dollars. Even though the stock market began to regain some of its losses, by the end of 1930, it just was not enough and America truly entered what is called the Great Depression.

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Bank Failures

Throughout the 1930s over 9,000 banks failed. Bank deposits were uninsured and thus as banks failed people simply lost their savings. Surviving banks, unsure of the economic situation and concerned for their own survival, stopped being as willing to create new loans. This exacerbated the situation leading to less and less expenditures.

Reduction in Purchasing Across the Board

With the stock market crash and the fears of further economic woes, individuals from all classes stopped purchasing items. This then led to a reduction in the number of items produced and thus a reduction in the workforce. As people lost their jobs, they were unable to keep up with paying for items they had bought through installment plans and their items were repossessed. More and more inventory began to accumulate. The unemployment rate rose above 25% which meant, of course, even less spending to help alleviate the economic situation.

American Economic Policy with Europe

As businesses began failing, the government created the Smoot-Hawley Tariff in 1930 to help protect American companies. This charged a high tax for imports thereby leading to less trade between America and foreign countries along with some economic retaliation.

5. Drought Conditions

While not a direct cause of the Great Depression, the drought that occurred in the Mississippi Valley in 1930 was of such proportions that many could not even pay their taxes or other debts and had to sell their farms for no profit to themselves. This was the topic of John Steinbeck’s The Grapes of Wrath.


The Organization of Petroleum Exporting Countries proclaimed an oil embargo in response to the U.S. decision to re- supply the Israeli military during the Kippur war; it lasted until march 1974.

The U.S. action was seen the long term possibility of high oil prices, disrupted supply and recession.

Many people believe that consumption was the root cause of the energy critic.

The crisis was essentially one of control the result of over-consumption on top USA flawed energy policies.

Industrialized economies relied on crude oil, and OPEC was their predominant supplier. Because of the dramatic inflation experienced during this period, a popular economic theory has been that these price increases were to blame, as being suppressive of economic activity.

(2008-2012 global recession, 2012)

(Jyoti Arora Notes, 2012)

(American History, 2012)


The late-2009s recession, often called the Great Recession, is a severe ongoing global economic recession that began in the United States in December 2007.It come to its dangerous shape in 2008 and spread into many countries. The Great Recession has affected the entire world economy with higher detriment in some countries than others. It is a major global recession characterized by various systemic imbalances and was sparked by the outbreak of the 2007-2012 global financial crisis .

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There was two types of world recession: 1st was a less precise sense, referring broadly to “a period of reduced economic activity. And the second one was the academic sense used most often in economics, which is defined operationally, referring specifically to the contraction phase of a business cycle.

(Recession, 2012)


Question- Analyse the role of wage and price flexibility in relation to economic instability and its correction. The analysis must include classical and Keynesian view.



A shock to the short-run aggregate market caused by an increase in aggregate demand, resulting in and illustrated by a rightward shift of the aggregate demand curve. An increase in aggregate demand in the short-run aggregate market results in an increase in the price level and an increase in real production.

In short-run, output will deviate from full employment capacity as prices in the goods and services market deviate from the price level that people expected. The strong and higher price level in the goods and services market will temporarily improve profit margins.

The Role of Flexible Wages and Prices according to classical view

The classical economists believed that Say’s Law and the flexibility of interest rates would ensure that spending would be adequate to maintain full employment. But some critics were unconvinced. Suppose that households chose to “hoard” some of their income. (Hoarding money is the act of hiding it or storing it.) When people are concerned about the future, they may choose to hide money in a mattress or in a cookie jar so that they will have something to tide them over during hard times. (Households may prefer this form of saving if they lack confidence in the banking system-a situation that existed in the 1920s, when there were numerous bank failures.) This method of saving creates problems for Say’s Law because it removes money from circulation. If households choose to hoard money in cookie jars, that money can’t be borrowed by businesses and invested. As a consequence, spending may decline and unemployment may appear. Although the classical economists admitted that hoarding could cause spending to decline, they did not believe that it would lead to unemployment. Full employment would be maintained because wage and price adjustments would compensate for any deficiency in total spending. The existence of flexible wages and prices implies an AS curve that is vertical, not upward-sloping as in the initial section of this chapter. Recall that the upward slope of the earlier AS curve resulted from the assumption that wage rates and some other input prices remain fixed in the short run. Given these rigidities, an increase in the price level would allow businesses to profit by expanding output, thus producing the upward-sloping AS curve. But the classical economists believed that all prices-including wage rates (the price of labor) and other input prices-were highly flexible. An increase in product prices would therefore be quickly matched by higher costs, which would eliminate any incentive to expand output.


Question- Outline the consequences of economic instability:

Recession and its affects-

Recession is a Business cycle contraction and a economic activity in general slowdown. Recession occur simultaneously when there is a widespread drop in spending. Economics statistician Julius Shiskin suggested it as several rules of thumb for defining it one which was “Two consecutive quarters of GDP”.The National Bureau of Economics Research define it as “a significant decline in economic activity”. In the UK it is defined as 2 successive quarters of negative growth. According to Economist Richard C. koo under the ideal condition recession develop when the economy of a country become imbalanced and it create pressure for the another countries. Recessions have psychological and confidence aspects.

Whenever Recession comes into any country it affects every single person of the country like lower class, middle class and higher class. If recession comes to one country then it effects another countries as well sometime in positive way or sometime in negative way. There are some elements which are mainly affected by the recession like employment, price, investment, etc. Sometimes recession converted into depression. The living standard of common people are depends on their wages and salaries, so if they lose their job or work due to recession then it can be a huge problem for them and their families. The most recent recession was come in United Kingdom which is called as late 2000s recession. UK is still suffering from the negative effects of that recession.

(Recession, 2012)


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