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Consumption Effect on Aggregate Demand - 1920s

            Aggregate Demand is the total value of real GDP that all sectors of the economy are willing to purchase at various price levels. One of the components of GDP that contributes to aggregate demand is consumption. Throughout the Great Depression we see how the consumption effect and the decrease in spending fed the depression. Consumption is affected by the change in wealth, consumer confidence and expectations, household debt, and taxes. We see these factors drive the change in consumption in some of the causes of the Great Depression and the aggregate demand curve shifts to the left. There were three possible causes to the Great Depression which are panic and the stock market crash, bank failures, and government intervention.
             Just before the Depression, in the early 1920s, the economy was roaring. Easy credit and installment buying led people to purchase goods they couldn't afford such as automobiles, appliances, and clothes. By 1929, Americans racked up six billion dollars in personal debt which was more than double the 1921 levels. We see here that high household debts, meant high debt to income ratios. This would now restrict access to future credit and thus reduce spending on high-ticket items usually bought on credit. Eventually the government reduces a third of the money supply in the economy which reduced the availability of loans. With lack of loans from the change in money supply, interest rates went up. This changed customer expectations by signaling wise investors to get out of the market.
             Until September 1929, the stock continued to rise as people assumed the prices would continue moving upward. Inexperienced investors were buying stocks on margin. However, on October 29th, also known as Black Tuesday, stocks dropped by 150 points and 16 million shares were sold. Many who bought stocks on margin were wiped out. This was all caused by bank who were lending money to people who couldn't afford it.

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