The U.K.'s Departure from the Gold Standard
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Questions and Answers

What was the Dow Jones Index at its peak in September before the Great Crash?

  • 198
  • 381 (correct)
  • 100
  • 250

    • Which hypothesis attributes the Great Depression to a decrease in consumer spending?

  • The monetary hypothesis
  • Transmission mechanisms
  • The spending hypothesis (correct)
  • The credit crunch hypothesis

    • What effect did the Great Crash have on new machine orders in 1929?

  • Increased
  • Remained constant
  • Plummeted (correct)
  • Fluctuated

    • What was the Dow Jones Index trough at in November after the Great Crash?

    <p>198</p> Signup and view all the answers

    What did Tobin's Q measure in relation to the Great Depression?

    <p>Investment behavior</p> Signup and view all the answers

    According to Romer, what was the impact on household consumption behavior during the Great Depression?

    <p>Uncertainty effect: consumers delay purchase of big-ticket items</p> Signup and view all the answers

    Who wrote 'Did monetary forces cause the Great Depression' and what did they conclude?

    <p>Peter Temin, concluded that monetary forces caused the Great Depression.</p> Signup and view all the answers

    What is the primary focus of Milton Friedman and Anna Schwartz's work on the Great Depression?

    <p>The role of a monetary contraction in causing the depression</p> Signup and view all the answers

    What did the spending hypothesis, proposed by Christina Romer, suggest as a cause of the Great Depression?

    <p>A drop in autonomous consumption demand due to the Great Crash</p> Signup and view all the answers

    What characterized the new phase of the Great Depression following the first banking crisis?

    <p>A decrease in deposits and an increase in currency in circulation</p> Signup and view all the answers

    What did Keynes and Hansen's secular stagnation thesis attribute to a decline in demand?

    <p>A slowdown in population growth</p> Signup and view all the answers

    What did the monetary hypothesis suggest about the Federal Reserve's role during the Great Depression?

    <p>It failed to stabilize the money supply as a lender of last resort</p> Signup and view all the answers

    What played a role in the banking crises during the Great Depression according to the text?

    <p>Fractional reserve banking, which creates bank run risk</p> Signup and view all the answers

    Who became influential among policymakers with their work on the Great Depression?

    <p>Milton Friedman and Anna Schwartz</p> Signup and view all the answers

    Which hypothesis provides an explanation for the transmission of monetary shocks to the real economy?

    <p>Spending hypothesis</p> Signup and view all the answers

    What impact does wage deflation have on real wages and employment?

    <p>Real wages increase and jobs decrease</p> Signup and view all the answers

    What was the impact of deflation on expected real interest rates during the Great Depression?

    <p>Minimal impact on expected real interest rates</p> Signup and view all the answers

    What happened to internal debt between 1929 and 1933?

    <p>Decreased by 20%</p> Signup and view all the answers

    What happens to credit spreads after a banking crisis?

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

    How does the IS-LM model explain the credit crunch hypothesis?

    <p>$IS$ curve shifts from $IS_0$ to $IS_1$ due to wider credit spreads</p> Signup and view all the answers

    What is the impact of debt deflation on borrowers and creditors?

    <p>Wealth transfer from borrowers to creditors</p> Signup and view all the answers

    What happens to new bank loans in comparison to personal income after banking crises?

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

    What is the impact of unionization rates on price flexibility?

    <p>Prices became less flexible over time due to unionization rates</p> Signup and view all the answers

    What was the Fed's response to the U.S.'s gold outflows during the Great Depression?

    <p>Sharply raising interest rates to defend the Gold Standard and the fixed exchange rate</p> Signup and view all the answers

    What is one of the criticisms of the monetary hypothesis in relation to the Great Depression?

    <p>Failing to prevent bank failures</p> Signup and view all the answers

    What role did illiquidity and insolvency play in the banking crisis during the Great Depression?

    <p>Both illiquidity and insolvency played a role, with insolvent banks having liabilities greater than their assets</p> Signup and view all the answers

    What does the reserve multiplier and monetary base data indicate about the Fed's policy during the Great Depression?

    <p>The Fed's expansionary policy was too little to offset the loss of traction due to the banking crisis</p> Signup and view all the answers

    What made it difficult for banks to distinguish good from bad borrowers during the Great Depression?

    <p>Extensive information asymmetries between borrowers and lenders</p> Signup and view all the answers

    What is attributed as one of the reasons for the Fed's failure to act as a lender of last resort during the Great Depression?

    <p>Political pressures and fear of inflation</p> Signup and view all the answers

    What was the Dow Jones Index at the peak in September before the Great Crash?

    <p>381</p> Signup and view all the answers

    What was the Dow Jones Index trough at in November after the Great Crash?

    <p>198</p> Signup and view all the answers

    What was the impact of the Great Crash on new machine orders in 1929?

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

    What did Tobin's Q measure in relation to the Great Depression?

    <p>Investment behavior</p> Signup and view all the answers

    What characterized the new phase of the Great Depression following the first banking crisis?

    <p>'Remarkably strong consumption drop'</p> Signup and view all the answers

    What is one of the criticisms of the monetary hypothesis in relation to the Great Depression?

    <p>'It overlooks the impact of credit crunch'</p> Signup and view all the answers

    What is attributed as one of the reasons for the Fed's failure to act as a lender of last resort during the Great Depression?

    <p>'Illiquidity and insolvency'</p> Signup and view all the answers

    What did the Fed's response to the U.S.'s gold outflows during the Great Depression lead to?

    <p>Intensified banking problems</p> Signup and view all the answers

    What is a criticism of the monetary hypothesis in relation to the Great Depression?

    <p>It failed to prevent bank failures</p> Signup and view all the answers

    What role did illiquidity and insolvency play in the banking crisis during the Great Depression?

    <p>Both illiquidity and insolvency contributed to the crisis, with insolvent banks having liabilities greater than their assets</p> Signup and view all the answers

    What did extensive information asymmetries between borrowers and lenders during the Great Depression contribute to?

    <p>The credit crunch</p> Signup and view all the answers

    What did reserve multiplier and monetary base data indicate about the Fed's policy during the Great Depression?

    <p>The Fed's expansionary policy was too little to offset the loss of traction due to the banking crisis</p> Signup and view all the answers

    What made it difficult for banks to distinguish good from bad borrowers during the Great Depression?

    <p>Extensive information asymmetries between borrowers and lenders</p> Signup and view all the answers

    What is attributed as one of the reasons for the Fed's failure to act as a lender of last resort during the Great Depression?

    <p>Fractional reserve banking system's multiple sunspot equilibria and shift in Fed power to less experienced individuals</p> Signup and view all the answers

    What did Milton Friedman and Anna Schwartz argue caused the Great Depression in the U.S.?

    <p>A monetary contraction through a series of banking crises</p> Signup and view all the answers

    What characterized the first banking crisis in October 1930?

    <p>Bank of United States going bankrupt, leading to a wave of bank failures</p> Signup and view all the answers

    What did the monetary hypothesis suggest about the role of the Federal Reserve during the Great Depression?

    <p>It failed to stabilize the money supply by acting as a lender of last resort</p> Signup and view all the answers

    What was characteristic of the second banking crisis in March 1931?

    <p>A smaller U.S. banking crisis and the start of a central European banking crisis</p> Signup and view all the answers

    'Keynes and Hansen's secular stagnation thesis' points to what as a cause of decline in demand?

    <p>$h(x) = \frac{4x^2 - 9}{2x + 3}$</p> Signup and view all the answers

    Who became influential among policymakers with their work on the Great Depression?

    <p>Milton Friedman and Anna Schwartz</p> Signup and view all the answers

    What is the impact of wage deflation on employment?

    <p>It leads to fewer jobs</p> Signup and view all the answers

    What is the impact of debt deflation on borrowers and creditors?

    <p>It results in a wealth transfer from borrowers to creditors and lower aggregate demand when creditors have a low propensity to consume</p> Signup and view all the answers

    What happened to internal debt between 1929 and 1933?

    <p>It decreased by 20%</p> Signup and view all the answers

    What did the IS-LM model explain about the credit crunch hypothesis?

    <p>$firms pay a higher premium for credit, causing the average firm's IS curve to shift from IS0 to IS1$</p> Signup and view all the answers

    What was the impact of deflation on expected real interest rates during the Great Depression?

    <p>$Expected real interest rates may increase when deflation is anticipated, leading to lower investment and higher savings$</p> Signup and view all the answers

    What did loss of relationship-specific knowledge during bank failures result in?

    <p>$Disruption of the financial system and difficulty for clients to find new sources of credit$</p> Signup and view all the answers

    What happens to credit spreads after each banking crisis?

    <p>They increase</p> Signup and view all the answers

    Study Notes

    • The U.K. leaves the Gold Standard in September 1931, triggering doubts about the stability of the Gold Standard and causing violent international capital flows.

    • The Fed responds to the U.S.'s gold outflows by sharply raising interest rates to defend the Gold Standard and the fixed exchange rate, which intensifies banking problems.

    • The Fed's failure to act as a lender of last resort during the Great Depression is attributed to the fractional reserve banking system's multiple sunspot equilibria and the shift in Fed power to less experienced individuals.

    • Money supply and output decline during the Great Depression, but risk-free interest rates should have increased instead.

    • The monetary hypothesis is criticized for failing to prevent bank failures and for being an incomplete explanation of the economic crisis.

    • Illiquidity and insolvency both played a role in the banking crisis during the Great Depression, with insolvent banks having liabilities greater than their assets.

    • Reserve multiplier and monetary base data indicate that the Fed's expansionary policy was too little to offset the loss of traction due to the banking crisis.

    • Extensive information asymmetries between borrowers and lenders during the Great Depression made it difficult to distinguish good from bad borrowers, contributing to the credit crunch.

    • The Fed's failure to act as a lender of last resort during the Great Depression led to a prolonged period of economic hardship.

    • The monetary hypothesis suggests that the Fed's expansionary policy was insufficient to counteract the deflationary forces unleashed by the banking crisis.

    • The credit crunch hypothesis emphasizes the role of extensive information asymmetries in the banking crisis, making it difficult for banks to distinguish good from bad borrowers.

    • Banks accumulate relationship-specific knowledge that is crucial for providing credit to customers

    • Loss of relationship-specific knowledge during bank failures disrupts the financial system and makes it difficult for clients to find new sources of credit

    • The failure of a bank results in increased credit spreads and less available credit

    • During the Great Depression, asset prices plummeted, negatively affecting potential borrowers' net worth and leading to less credit and higher credit spreads

    • Credit spreads rise after each banking crisis, and new bank loans decrease in comparison to personal income

    • The IS-LM model explains the credit crunch hypothesis: as credit spreads widen, firms pay a higher premium for credit, causing the average firm's IS curve to shift from IS0 to IS1

    • Banking crises cause a decrease in the money supply and an increase in credit spreads, while output decreases and risk-free rates fall

    • The spending hypothesis, monetary hypothesis, and credit crunch hypothesis are different explanations for the transmission of monetary shocks to the real economy

    • Prices became less flexible over time, and wages became more rigid due to unionization rates, making the economy more susceptible to protracted deflation

    • During the Great Depression, prices declined for three years (protracted deflation)

    • Expected real interest rates may increase when deflation is anticipated, leading to lower investment and higher savings

    • Wage deflation causes real wages to increase but results in fewer jobs

    • Debt deflation makes it more difficult for borrowers to repay their debts, resulting in a wealth transfer from borrowers to creditors and lower aggregate demand when creditors have a low propensity to consume

    • Deflation was not anticipated during the Great Depression, and its impact on ex ante expected real interest rates was minimal

    • Prices fell faster than wages during the Great Depression, making the wage-adjusted real wage higher than the nominal wage

    • Between 1929 and 1933, internal debt decreased by 20%, but real debt increased due to deflation.

    These bullet points provide an overview of the text's key points and facts, while also maintaining context and relevance to the text.

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    Lecture 6 - The U.S. Great Depression PDF

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    Test your knowledge about the U.K.'s departure from the Gold Standard in September 1931 and its impact on global economics and financial systems.

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