Popular accounts often say the Great Depression was caused by the stock market crash of 1929. This may be overstating its total effect. Nevertheless, the crash was important. The stock market had boomed from 1921 to 1929. On October 28, 1929, the stock market price index dropped from 298 to 260. The next day, it dropped further to 230. By November the index was down to 198.

  1. What do you think the fall in stock prices did to consumption ?
  2. What do you think the fall in stock prices and the volatility in the economy did to investment ?
  3. Given your answers to questions 1 and 2, how did the stock market crash affect the IS curve ?
  4. What was the effect of the stock market crash on output and the interest rate ?