Which factor contributed to the Great Depression by limiting money supply and reducing demand?

Which factor contributed to the Great Depression by limiting money supply and reducing demand?

• A. Tariffs and trade barriers
• B. The gold standard
• C. Overproduction
• D. Bank runs

Answer: (B)

The key idea is how the gold standard limited how much money could be created. When a country operates on the gold standard, its currency is backed by gold, and the money supply can only grow if there’s enough gold to back it. In the early 1930s, as demand collapsed, authorities wanted to expand credit and spending, but maintaining convertibility to gold kept the money supply tight. That constraint helped cause deflation, so prices fell and real debts rose, which reduced consumer and business spending even more. With less money chasing goods, aggregate demand shrank, deepening the downturn. Other factors like tariffs, overproduction, or bank runs affected the economy too, but the mechanism that directly tied money supply to a fixed standard and thus dampened demand most clearly fits this choice.

The key idea is how the gold standard limited how much money could be created. When a country operates on the gold standard, its currency is backed by gold, and the money supply can only grow if there’s enough gold to back it. In the early 1930s, as demand collapsed, authorities wanted to expand credit and spending, but maintaining convertibility to gold kept the money supply tight. That constraint helped cause deflation, so prices fell and real debts rose, which reduced consumer and business spending even more. With less money chasing goods, aggregate demand shrank, deepening the downturn. Other factors like tariffs, overproduction, or bank runs affected the economy too, but the mechanism that directly tied money supply to a fixed standard and thus dampened demand most clearly fits this choice.