56 Questions
What was the Dow Jones Index at its peak in September before the Great Crash?
381
Which hypothesis attributes the Great Depression to a decrease in consumer spending?
The spending hypothesis
What effect did the Great Crash have on new machine orders in 1929?
Plummeted
What was the Dow Jones Index trough at in November after the Great Crash?
198
What did Tobin's Q measure in relation to the Great Depression?
Investment behavior
According to Romer, what was the impact on household consumption behavior during the Great Depression?
Uncertainty effect: consumers delay purchase of big-ticket items
Who wrote 'Did monetary forces cause the Great Depression' and what did they conclude?
Peter Temin, concluded that monetary forces caused the Great Depression.
What is the primary focus of Milton Friedman and Anna Schwartz's work on the Great Depression?
The role of a monetary contraction in causing the depression
What did the spending hypothesis, proposed by Christina Romer, suggest as a cause of the Great Depression?
A drop in autonomous consumption demand due to the Great Crash
What characterized the new phase of the Great Depression following the first banking crisis?
A decrease in deposits and an increase in currency in circulation
What did Keynes and Hansen's secular stagnation thesis attribute to a decline in demand?
A slowdown in population growth
What did the monetary hypothesis suggest about the Federal Reserve's role during the Great Depression?
It failed to stabilize the money supply as a lender of last resort
What played a role in the banking crises during the Great Depression according to the text?
Fractional reserve banking, which creates bank run risk
Who became influential among policymakers with their work on the Great Depression?
Milton Friedman and Anna Schwartz
Which hypothesis provides an explanation for the transmission of monetary shocks to the real economy?
Spending hypothesis
What impact does wage deflation have on real wages and employment?
Real wages increase and jobs decrease
What was the impact of deflation on expected real interest rates during the Great Depression?
Minimal impact on expected real interest rates
What happened to internal debt between 1929 and 1933?
Decreased by 20%
What happens to credit spreads after a banking crisis?
Rise
How does the IS-LM model explain the credit crunch hypothesis?
$IS$ curve shifts from $IS_0$ to $IS_1$ due to wider credit spreads
What is the impact of debt deflation on borrowers and creditors?
Wealth transfer from borrowers to creditors
What happens to new bank loans in comparison to personal income after banking crises?
Decrease
What is the impact of unionization rates on price flexibility?
Prices became less flexible over time due to unionization rates
What was the Fed's response to the U.S.'s gold outflows during the Great Depression?
Sharply raising interest rates to defend the Gold Standard and the fixed exchange rate
What is one of the criticisms of the monetary hypothesis in relation to the Great Depression?
Failing to prevent bank failures
What role did illiquidity and insolvency play in the banking crisis during the Great Depression?
Both illiquidity and insolvency played a role, with insolvent banks having liabilities greater than their assets
What does the reserve multiplier and monetary base data indicate about the Fed's policy during the Great Depression?
The Fed's expansionary policy was too little to offset the loss of traction due to the banking crisis
What made it difficult for banks to distinguish good from bad borrowers during the Great Depression?
Extensive information asymmetries between borrowers and lenders
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?
Political pressures and fear of inflation
What was the Dow Jones Index at the peak in September before the Great Crash?
381
What was the Dow Jones Index trough at in November after the Great Crash?
198
What was the impact of the Great Crash on new machine orders in 1929?
Plummeted
What did Tobin's Q measure in relation to the Great Depression?
Investment behavior
What characterized the new phase of the Great Depression following the first banking crisis?
'Remarkably strong consumption drop'
What is one of the criticisms of the monetary hypothesis in relation to the Great Depression?
'It overlooks the impact of credit crunch'
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?
'Illiquidity and insolvency'
What did the Fed's response to the U.S.'s gold outflows during the Great Depression lead to?
Intensified banking problems
What is a criticism of the monetary hypothesis in relation to the Great Depression?
It failed to prevent bank failures
What role did illiquidity and insolvency play in the banking crisis during the Great Depression?
Both illiquidity and insolvency contributed to the crisis, with insolvent banks having liabilities greater than their assets
What did extensive information asymmetries between borrowers and lenders during the Great Depression contribute to?
The credit crunch
What did reserve multiplier and monetary base data indicate about the Fed's policy during the Great Depression?
The Fed's expansionary policy was too little to offset the loss of traction due to the banking crisis
What made it difficult for banks to distinguish good from bad borrowers during the Great Depression?
Extensive information asymmetries between borrowers and lenders
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?
Fractional reserve banking system's multiple sunspot equilibria and shift in Fed power to less experienced individuals
What did Milton Friedman and Anna Schwartz argue caused the Great Depression in the U.S.?
A monetary contraction through a series of banking crises
What characterized the first banking crisis in October 1930?
Bank of United States going bankrupt, leading to a wave of bank failures
What did the monetary hypothesis suggest about the role of the Federal Reserve during the Great Depression?
It failed to stabilize the money supply by acting as a lender of last resort
What was characteristic of the second banking crisis in March 1931?
A smaller U.S. banking crisis and the start of a central European banking crisis
'Keynes and Hansen's secular stagnation thesis' points to what as a cause of decline in demand?
$h(x) = \frac{4x^2 - 9}{2x + 3}$
Who became influential among policymakers with their work on the Great Depression?
Milton Friedman and Anna Schwartz
What is the impact of wage deflation on employment?
It leads to fewer jobs
What is the impact of debt deflation on borrowers and creditors?
It results in a wealth transfer from borrowers to creditors and lower aggregate demand when creditors have a low propensity to consume
What happened to internal debt between 1929 and 1933?
It decreased by 20%
What did the IS-LM model explain about the credit crunch hypothesis?
$firms pay a higher premium for credit, causing the average firm's IS curve to shift from IS0 to IS1$
What was the impact of deflation on expected real interest rates during the Great Depression?
$Expected real interest rates may increase when deflation is anticipated, leading to lower investment and higher savings$
What did loss of relationship-specific knowledge during bank failures result in?
$Disruption of the financial system and difficulty for clients to find new sources of credit$
What happens to credit spreads after each banking crisis?
They increase
Study Notes
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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.
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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.
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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.
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Money supply and output decline during the Great Depression, but risk-free interest rates should have increased instead.
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The monetary hypothesis is criticized for failing to prevent bank failures and for being an incomplete explanation of the economic crisis.
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Illiquidity and insolvency both played a role in the banking crisis during the Great Depression, with insolvent banks having liabilities greater than their assets.
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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.
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The Fed's failure to act as a lender of last resort during the Great Depression led to a prolonged period of economic hardship.
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The monetary hypothesis suggests that the Fed's expansionary policy was insufficient to counteract the deflationary forces unleashed by the banking crisis.
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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.
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Banks accumulate relationship-specific knowledge that is crucial for providing credit to customers
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Loss of relationship-specific knowledge during bank failures disrupts the financial system and makes it difficult for clients to find new sources of credit
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The failure of a bank results in increased credit spreads and less available credit
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During the Great Depression, asset prices plummeted, negatively affecting potential borrowers' net worth and leading to less credit and higher credit spreads
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Credit spreads rise after each banking crisis, and new bank loans decrease in comparison to personal income
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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
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Banking crises cause a decrease in the money supply and an increase in credit spreads, while output decreases and risk-free rates fall
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The spending hypothesis, monetary hypothesis, and credit crunch hypothesis are different explanations for the transmission of monetary shocks to the real economy
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Prices became less flexible over time, and wages became more rigid due to unionization rates, making the economy more susceptible to protracted deflation
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During the Great Depression, prices declined for three years (protracted deflation)
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Expected real interest rates may increase when deflation is anticipated, leading to lower investment and higher savings
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Wage deflation causes real wages to increase but results in fewer jobs
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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
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Deflation was not anticipated during the Great Depression, and its impact on ex ante expected real interest rates was minimal
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Prices fell faster than wages during the Great Depression, making the wage-adjusted real wage higher than the nominal wage
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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.
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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