Historically, the United States economy has experienced recurring periods of demand-pull inflationary gap, deflationary gap and cost-push stagflation. Each economic era affects the country’s gross domestic product (GDP) and employment rates significantly. For example, the US economy suffered immensely from the prolonged deflationary gap, which was one of the key causes of the Great Depression. The Great Depression, experienced from 1928-1933, was one of the worst periods in the US economic history.
Deflationary gap can simply be termed as an economic period associated with the decline in the prices of goods and services. Among the significant causes of the Great Depression was the fall in asset and commodity prices; fear set in and people were afraid to spend on investments and consumer goods. The result was a subsequent drop in the prices of goods and services; a trend that had a negative impact on businesses and the economy (Tucker 260).
One of the key consequences of the Great Depression was the rise in the unemployment levels (to around 25 %) contributed by the collapse of banks and other key businesses (Knoop 151). The rising unemployment came along with the fall in GDP (by around 50 %) within the same period. As people withheld their money, spending reduced, and the prices of goods fell by an average of 40%. Personal bankruptcy was also a common phenomenon during the Great Depression.
The lessons learnt from the Great Depression necessitated modern monetary policies that regulate interest rates and money supply. Monetary economists believe that the Federal Reserve has a prominent role to play in controlling deflationary and inflationary gaps. Such hindsight is crucial in the management of the country’s economy to prevent a repeat of the Great Depression disaster in the future.
Knoop, Todd A. Recessions and depressions: Understanding business cycles. Santa Barbara, CA: ABC-CLIO, 2009. Print.
Tucker, Irvin B. Survey of Economics. Stamford: Cengage learning, 2010.Print.