The correct option is 2 and 3 only.
Explanation
The Great Depression of 1929 was a watershed moment in economic history. It exposed the limitations of the prevailing Classical economic theories, which assumed that free markets would automatically adjust to ensure full employment. The inability of these theories to explain or resolve prolonged mass unemployment led to a paradigm shift in economic thought.
Statement-wise Analysis:
- Statement 1 is Incorrect. The Classical tradition relied on "Say's Law," which posited that supply creates its own demand, ensuring full employment in the long run. The Great Depression, characterized by persistent and high unemployment rates, shattered this belief. Instead of reinforcing the Classical view, the crisis demonstrated that an economy could remain in a state of underemployment equilibrium for an extended period.
- Statement 2 is Correct. The Depression highlighted that economic sectors are deeply interconnected. A collapse in one sector reduces income and demand, which subsequently impacts other sectors. This realization emphasized the need to analyze the economy as a whole (aggregate demand and supply) rather than focusing solely on individual markets in isolation.
- Statement 3 is Correct. In response to the crisis, John Maynard Keynes published The General Theory of Employment, Interest and Money in 1936. This work provided a theoretical framework to understand economy-wide phenomena such as total output and employment levels. This marked the emergence of Macroeconomics as a distinct discipline separate from Microeconomics.
Key Takeaway:
The Great Depression disproved the Classical assumption of automatic full employment and necessitated the birth of Macroeconomics to study the interdependence of economic sectors and the role of aggregate demand.