According to the "spending hypothesis" an exogenous fall in spending on goods and services triggered the Great Depression in 1930. According to the competing "money hypothesis" the willingness of the Fed to permit a large fall in money stock triggered the Great Depression 1930. Use the IS/LM model developed in class and the data in the attached file to distinguish between these hypotheses. Which hypothesis do the data support?

 

Governmen Purchases Real GNP Consumption Investment Unemployment Rate (1) (2) Year (2) (2) 1929 3.2 203.6 139.6 40.4 22.0 1930 8.9 183.5 130.4 27.4 24.3 1931 16.3 169.5 126.1 16.8 25.4 1932 24.1 144.2 114.8 4.7 24.2 1933 25.2 141.5 112.8 5.3 23.3 1934 22.0 154.3 118.1 9.4 26.6 1935 20.3 169.5 125.5 18.0 27.0 24.0 31.8 193.2 203.2 1936 17.0 138.4 1937 14.3 143.1 29.9 30.8 1938 19.1 192.9 140.2 17.0 33.9 1939 17.2 209.4 148.2 24.7 35.2 1940 14.6 227.2 155.7 33.0 36.4 Source: Historical Statistics of the United States, Colonial Times to 1970, Parts I and i (Washington, DC: U.S. Department of Commerce, Bureau of Census, 1975). Note: (1) The unemployment rate is series D9. (2) Real GNP, consumption, investment, and government purchases are series F3, F48, FS2, and F66, and are measured in billions of 1958 dollars. (3) The interest rate is the prime Commerc Money Supply (4) Nominal Price Level Inflation Real Money Balances (7) Year Interest Rate (3) (5) (6) 1929 5.9 26.6 50.6 52.6 1930 3.6 25.8 49.3 -2.6 52.3 1931 2.6 24.1 44.8 -10,1 54.5 1932 2.7 21.1 40.2 -9.3 52.5 1933 1.7 19.9 39.3 -2.2 50.7 1934 1.0 21.9 42.2 7.4 S1.8 1935 0.8 25.9 42.6 0.9 60.8 1936 0.8 29.6 42.7 0.2 62.9 1937 0.9 30.9 44.5 4.2 69.5 1938 0.8 30.5 43.9 -1.3 69.5 1939 0.6 34.2 43.2 -1.6 79.1 1940 0.6 39.7 43.9 1.6 90.3