Post-WW1 Reparations and Government Expenditures Quiz
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Questions and Answers

During the Great Depression, which country experienced the mildest decline in industrial production?

  • Sweden
  • Japan (correct)
  • Netherlands
  • Norway

    • Which country had the highest industrial unemployment rate during the Great Depression?

  • U.S.
  • Germany (correct)
  • Denmark
  • Norway

    • In which year did the U.S. experience a significant increase in car ownership during the Roaring Twenties?

  • 1920
  • 1927
  • 1925
  • 1929 (correct)

    • What was the percentage increase in car ownership from 1920 to 1929 in the U.S.?

    Signup and view all the answers

    During the Great Depression, which country experienced a decline of 16% in industrial production?

    <p>Netherlands</p> Signup and view all the answers

    What was the peak number of new houses built during the housing boom in the mid-1920s in the U.S.?

    <p>$937,000$</p> Signup and view all the answers

    Which two countries had a decline in industrial production during the Great Depression that was less than half that of Germany's decline?

    <p>Sweden and Norway</p> Signup and view all the answers

    What event marked the beginning of the Great Depression in October 1929?

    <p>The Federal Reserve's contractionary turn</p> Signup and view all the answers

    What factor contributed to the increase in real estate development and mortgage credit-to-GDP ratio between 1921 and 1929?

    <p>Financial booms and a mortgage lending boom</p> Signup and view all the answers

    What led to a negative feedback loop between credit and stock prices during the 1920s?

    <p>Credit expansion fueling rising asset prices and increasing aggregate demand</p> Signup and view all the answers

    What characterized the Roaring Twenties despite challenges from war debts, reparations, and hyperinflation?

    <p>Significant growth in the US economy</p> Signup and view all the answers

    In which country did the negative feedback loop of the financial instability hypothesis begin with an increase in social expenditures and introduction of new income tax?

    <p>Germany</p> Signup and view all the answers

    "Minsky moment" refers to what point in an economy?

    <p>$\text{Debt-to-income ratio becomes highly fragile}$</p> Signup and view all the answers

    What event triggered a financial crisis that contributed to the Great Depression in Germany?

    <p>$\text{Increase in social expenditures}$</p> Signup and view all the answers

    What was the primary budget status after the drastic government expenditure reduction?

    <p>Positive</p> Signup and view all the answers

    What was the rescheduled amount of reparation payments as per the Dawes Plan (1924)?

    <p>1 billion Marks/year until 1928; from 1928 onwards: 2.5 billion</p> Signup and view all the answers

    Under the Young Plan (1929), what was abolished, intensifying the balance of payment problem?

    <p>Transfer protection</p> Signup and view all the answers

    What were the winners of the hyperinflation's distributional effects?

    <p>Debtors</p> Signup and view all the answers

    What led to the erosion of political support for the Weimar Republic?

    <p>Limited economic policy space in the subsequent Depression</p> Signup and view all the answers

    What action by Reichsbank in 1927 slowed down capital inflows?

    <p>&quot;Reins in stock prices&quot;</p> Signup and view all the answers

    What was needed by Germany to obtain USD to pay back debt after the Young Plan (1929)?

    <p>Trade surplus</p> Signup and view all the answers

    What preceded the U.S. Great Depression according to the text?

    <p>Large financial booms in the Roaring Twenties</p> Signup and view all the answers

    What allowed Germany to join the Roaring Twenties temporarily?

    <p>Dawes Plan</p> Signup and view all the answers

    What was a major factor in the inflation crisis in Germany during 1921-1922?

    <p>Reparations</p> Signup and view all the answers

    What was the primary reason for the rapid increases in prices and currency depreciation in Germany during the hyperinflation period?

    <p>Monetization of ever larger deficits</p> Signup and view all the answers

    What was the only politically acceptable tax during the hyperinflation period in Germany?

    <p>Inflation</p> Signup and view all the answers

    What would have been the consequence of external default for post-WW1 Germany?

    <p>Risked occupation or resumption of hostilities</p> Signup and view all the answers

    Which authority sets interest rates and the money supply according to monetary theory?

    <p>Monetary authority</p> Signup and view all the answers

    What determined the price level according to fiscal theory?

    <p>Fiscal authority sets taxes and spending, and the monetary authority adjusts the money supply accordingly.</p> Signup and view all the answers

    What helped stabilize the economy and bring an end to hyperinflation in Germany?

    <p>Introduction of a new currency, the Rentenmark, and the end of debt monetization.</p> Signup and view all the answers

    During the Great Depression, which country experienced the mildest decline in industrial production?

    <p>Japan</p> Signup and view all the answers

    What was the percentage increase in car ownership from 1920 to 1929 in the U.S.?

    <p>129%</p> Signup and view all the answers

    What was the peak number of new houses built during the housing boom in the mid-1920s in the U.S.?

    <p>937,000</p> Signup and view all the answers

    What characterized the Roaring Twenties despite challenges from war debts, reparations, and hyperinflation?

    <p>Consumption boom</p> Signup and view all the answers

    What was needed by Germany to obtain USD to pay back debt after the Young Plan (1929)?

    <p>$Balanced trade or capital account surplus</p> Signup and view all the answers

    What event marked the beginning of the Great Depression in October 1929?

    <p>$Stock market crash</p> Signup and view all the answers

    What led to a negative feedback loop between credit and stock prices during the 1920s?

    <p>$Increase in social expenditures</p> Signup and view all the answers

    What was the primary consequence of the Ruhr campaign on Germany's economy?

    <p>It led to an increase in government spending and debt monetization, fueling hyperinflation.</p> Signup and view all the answers

    What was the primary reason for the introduction of a new currency, the Rentenmark, in Germany?

    <p>To stabilize the economy and combat hyperinflation.</p> Signup and view all the answers

    According to fiscal theory, what determines the price level?

    <p>The fiscal authority sets taxes and spending, and the monetary authority adjusts the money supply accordingly.</p> Signup and view all the answers

    What was the consequence of internal default for the German government during post-WW1?

    <p>It would have been politically suicide for the government.</p> Signup and view all the answers

    What was the main focus of Reichsbank's monetary policy during the inflation crisis?

    <p>Stabilizing interest rates rather than addressing underlying inflation crisis.</p> Signup and view all the answers

    In what way did prices and money supply dynamics contribute to Germany's hyperinflation crisis?

    <p>Prices outpaced growth of money supply, leading to real money fall and continued inflation rise.</p> Signup and view all the answers

    What was the annual reduction of reparation payments as per the Dawes Plan (1924)?

    <p>1 billion Marks/year until 1928; from 1928 onwards: 2.5 billion Marks</p> Signup and view all the answers

    What was the consequence of the Young Plan (1929) for Germany's capital inflows?

    <p>Sudden stop of capital inflows</p> Signup and view all the answers

    What were the winners of the hyperinflation's distributional effects?

    <p>Debtors</p> Signup and view all the answers

    What was the primary reason for limited economic policy space in the subsequent Depression?

    <p>Erosion of political support for Weimar Republic</p> Signup and view all the answers

    What characterized the Roaring Twenties despite challenges from war debts, reparations, and hyperinflation?

    <p>$Real GDP p.c.$ experienced a short recovery</p> Signup and view all the answers

    What led to a negative feedback loop between credit and stock prices during the 1920s?

    <p>$Capital incomes (senior)$</p> Signup and view all the answers

    What was the percentage increase in real GDP per capita in the United States from 1913 to 1929?

    <p>30%</p> Signup and view all the answers

    What was the primary reason for the increase in household indebtedness during the 1920s?

    <p>Rising consumer confidence</p> Signup and view all the answers

    What was the consequence of the Federal Reserve's contractionary turn in 1928 and 1929?

    <p>Start of the Great Depression</p> Signup and view all the answers

    What characterized Germany's financial challenges during the same period as the Roaring Twenties?

    <p>Introduction of new income tax</p> Signup and view all the answers

    What is the financial instability hypothesis primarily associated with?

    <p>$ ext{Aggregate demand}$ fluctuations</p> Signup and view all the answers

    In what way did credit expansion contribute to rising asset prices according to the financial instability hypothesis?

    <p>$ ext{Increased asset prices}$</p> Signup and view all the answers

    What triggered a financial crisis that contributed to the Great Depression in Germany?

    <p>Minor bad news of the Versailles Treaty</p> Signup and view all the answers

    Study Notes

    • Post-WW1: Government deficits, primarily due to national railways and reparations, led to substantial increases in government spending.

    • Reparations and war debts: Reparations accounted for a significant portion of the public deficit in 1921-1922.

    • German reparations and rising inflation: Reparations were a major factor in the inflation crisis in Germany during 1921-1922.

    • Monetization of debts: The German government, in an attempt to finance the public deficit and pay for reparations, had to rely on monetization of debts by the Reichsbank.

    • Hyperinflation begins: The monetization of ever larger deficits led to rapid increases in prices and currency depreciation. Inflation was the only politically acceptable tax, as evidenced by the quote from Hugo Stinnes.

    • Ruhr campaign and monetization: The Ruhr campaign, which saw French troops occupy the Rhineland, further escalated the conflict over reparation payments and led to an increase in government spending and debt monetization. This, in turn, fueled the hyperinflation.

    • Monetary vs. fiscal theory of price level: Monetary theory states that the monetary authority sets interest rates and the money supply, and the fiscal authority determines taxes and spending. Fiscal theory asserts that the fiscal authority sets taxes and spending, and the monetary authority adjusts the money supply accordingly.

    • Default not an option: External default would have destroyed the post-WW1 settlement and risked occupation or resumption of hostilities. Internal default would have been politically suicide for the government.

    • Fiscal or monetary policy dominance: The dominance of fiscal or monetary policy in determining the price level depends on the intra-governmental power relations.

    • Monetary confusion: Monetary policy accommodated the inflation, as the Reichsbank focused on stabilizing interest rates rather than addressing the underlying inflation crisis.

    • Indices and prices: Prices, as indicated in the figure, outpaced the growth of the money supply, leading to a situation where real money fell and inflation continued to rise.

    • Monetary and fiscal reform: The introduction of a new currency, the Rentenmark, and the end of debt monetization helped stabilize the economy and bring an end to the hyperinflation.

    • Post-WW1: Government deficits, primarily due to national railways and reparations, led to substantial increases in government spending.

    • Reparations and war debts: Reparations accounted for a significant portion of the public deficit in 1921-1922.

    • German reparations and rising inflation: Reparations were a major factor in the inflation crisis in Germany during 1921-1922.

    • Monetization of debts: The German government, in an attempt to finance the public deficit and pay for reparations, had to rely on monetization of debts by the Reichsbank.

    • Hyperinflation begins: The monetization of ever larger deficits led to rapid increases in prices and currency depreciation. Inflation was the only politically acceptable tax, as evidenced by the quote from Hugo Stinnes.

    • Ruhr campaign and monetization: The Ruhr campaign, which saw French troops occupy the Rhineland, further escalated the conflict over reparation payments and led to an increase in government spending and debt monetization. This, in turn, fueled the hyperinflation.

    • Monetary vs. fiscal theory of price level: Monetary theory states that the monetary authority sets interest rates and the money supply, and the fiscal authority determines taxes and spending. Fiscal theory asserts that the fiscal authority sets taxes and spending, and the monetary authority adjusts the money supply accordingly.

    • Default not an option: External default would have destroyed the post-WW1 settlement and risked occupation or resumption of hostilities. Internal default would have been politically suicide for the government.

    • Fiscal or monetary policy dominance: The dominance of fiscal or monetary policy in determining the price level depends on the intra-governmental power relations.

    • Monetary confusion: Monetary policy accommodated the inflation, as the Reichsbank focused on stabilizing interest rates rather than addressing the underlying inflation crisis.

    • Indices and prices: Prices, as indicated in the figure, outpaced the growth of the money supply, leading to a situation where real money fell and inflation continued to rise.

    • Monetary and fiscal reform: The introduction of a new currency, the Rentenmark, and the end of debt monetization helped stabilize the economy and bring an end to the hyperinflation.

    • The 1920s were a period of significant economic growth in the United States with real GDP per capita increasing from 100 in 1913 to 130 by 1929.

    • President Herbert Hoover expressed optimism about the country's progress towards eliminating poverty in the late 1920s.

    • In the 1920s, there were financial booms, including a mortgage lending boom leading to an increase in real estate development and a mortgage credit-to-GDP ratio that doubled between 1921 and 1929.

    • Household indebtedness, particularly in the form of installment debt, also increased significantly during this period, and equity prices began to decouple from dividends as a result of credit-financed stock purchases.

    • A negative feedback loop developed between credit and stock prices, leading to a significant increase in aggregate demand and an economic boom fueled by optimism about the prospects of the New Economy.

    • The financial instability hypothesis suggests that financial euphoria and depression lead to large aggregate demand fluctuations. During the euphoria phase, credit expansion fuels rising asset prices and increasing aggregate demand.

    • The Federal Reserve's contractionary turn in 1928 and 1929, in response to concerns about the stock market bubble and brokers' loans, led to an increase in interest rates and the beginning of the Great Depression in October 1929.

    • The 1920s were characterized by the Roaring Twenties, which saw significant growth in the US economy despite challenges from war debts, reparations, and hyperinflation.

    • In Germany during the same period, the Weimar Republic faced challenges in financing war welfare state and reparations without threatening economic growth. This led to a threefold increase in social expenditures and the introduction of new income tax.

    • Despite these challenges, large deficits resulted due to increasing public expenditures and a decrease in tax revenues. This put pressure on the German government to find ways to finance war costs and reparations.

    • In the case of Germany, the negative feedback loop of the financial instability hypothesis began with the increase in social expenditures and the introduction of new income tax, leading to a debt-to-income ratio that made the economy increasingly fragile.

    • The Minsky moment, or the point at which the economy becomes highly indebted, can be seen in the German context as well, with the minor bad news of the Versailles Treaty triggering a financial crisis that contributed to the Great Depression.

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    Test your knowledge on the impact of post-World War 1 reparations and their influence on government expenditures and inflation. This quiz is based on historical literature and economic events.

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