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All main topics / Economics / History of Economics

ECON 2200 Final Exam (88 Cards)

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From 1929-1933, Real GDP fell x/3.  Industrial output fell by x/2.  Investment spending was (less than/greater than) the replacement rate.  Consumer durables output fell by XX%.
RGDP - 1/3
Industrial output fell by 1/2
Investment spending < RR
Consumer durables fell by 80%
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In 1930, XX% of Americans owned an automobile.
60%
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What act created plans for a nation wide highway system?  Not including major structures like bridges, what percentage was the National government going to pay for?
Federal Road Act of 1916

50%
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What did the Federal Road Act of 1921 do?
It required the Secretary of Agriculture to give updates on progress of road building.  It was responsible for more money being spent in 1 year than the previous 5 years.
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Who discovered the importance of credit?
Martha Olney
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What did the Volstead act do?
It increased enforcement of prohibition laws
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T/F: Irving Fisher was originally against prohibition.
False - He was for it, along with the middle class.
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In 1929, the unemployment rate was about x.x%  In 1933, it was approaching XX%.  This included about 11.5 million                  with another 2.2 million in                                                        .
3.2%

25%

11.5m unemployed
2.2m in government created emergency jobs
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During the Great Depression the CPI, or Consumer Price Index,  fell by xx%.
25%
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From 1930-1933, nearly                 banks closed.  About 1/x of banks that existed in 1929 had failed by 1933.
10,000

1/3
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From 1929 to 1932, the S&P Composite Index fell from $26.02 to $X.XX.  By 1933, there was about $XX billion in stock losses.
$6.93

$85 billion in stock losses (these are ACTUAL losses)
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It took until 1939-1940 for what portion of the economy to return to pre-Depression rates?
Manufacturing
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From 1918 to 1925,                                  led to market saturation in the construction sector.
over-building
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According to the notes, from 1925 to 1928, the construction sector was experiencing a "                              " and then after 1928 a "                                ."
"gentle slide"

"market decline"
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What were the two main issues with the agricultural sector that helped lead to the Great Depression?
1) farm income growth lagged behind other sectors

2) farm debt increases along with rural bank failures
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Bank failures were especially prominent in the rural                  and                      areas of the country.
rural south and midwest
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What was the Fed's response to rural bank failures?
Nothing.  "If they fail, they were weak" mentality.
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The original Ponzi scheme promised investors a return based on buying what?  What did he do with the investment money?
US mail stamps were supposedly purchased in other countries for less than they were worth.

The money from newer investors was given to older investors to help spread claims that it was a real investment.
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Why did prices inflate in the Florida real estate bubble?  What should prices have been based on?  What happened to Miami specifically?
They were based on a feeling that prices would just continue to rise.

Prices should have been based on supply and demand.

Miami was the center of the bubble and was hit by a hurricane, destroying many worksites.
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In 1929, the S&P stock index had risen to XXX% of its 1922 level.
309% (see table 22.7 on page 413)
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T/F: Prior to the 1920s, investing in the stock market was primarily done by the wealthy.
True
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T/F: Stock prices (on average) rose consistently in the 1920s and showed an especially pronounced increase in 1928 and in the last three quarters of 1929.
True
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Stock prices rose faster than earnings.  Why is this bad?
The net price of an asset should reflect the net benefit you expect to get from the asset over the period you own it.  This is why it was said that the price did not reflect the "market fundamentals".
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From 1922 to 1929, the price to dividend ratio, on average, rose roughly $10 from $          to $             .  This reflects the price people are willing to pay per dollar of dividends they will receive.
$17.24 - $28.74
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Fisher, a notable economist of the time, theorized on the speculative bubble at the time.  Where did he feel the economy was?
Hoover also chimed in saying that "the nation had reached a level of prosperity..." that would completely eradicate what?
Fisher saw the economy at a permanent high plateau.  He felt no-one had anything to worry about.

Hoover thought the prosperity would eradicate poverty.
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Explain briefly White's "New Age" theory.
People began to believe that technology, invention, and innovation had changed the nature of production and that the US had entered a "New Age" of permanent growth and prosperity.
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T/F: Only the initial stock purchase for a company earns the company money for investment.
True
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Explain the Real Bills Doctrine and why it was enacted.
The Real Bills Doctrine aimed to stop or reduce speculative stock market loans by banks. This was enacted to increase loans targeting at firms' investments in capital.

The Fed limited the use of the discount window to banks whose own loans were backed by "real bills" (loans with tangible collateral).
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The Fed used "moral suasion" to pressure who/what? To do what?
banks, especially NYC banks

limit loans for stock purchases
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The Real Bills Doctrine was only some-what effective.  Why?
stock purchases continued to rise via purchases on margin
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T/F: If stock investors are using leveraging for stock purchases, they are more likely to pull out quicker if the stock price dips.
True - Leveraging, or buying on margin, increases losses beyond what you put into the stock if you make a loss.
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T/F: In August of 1929, the Fed decreased the discount rate.
False - increased the DR from 4.5% to 6% to discourage loans for speculation
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By 1929, there were $X.X billion in brokers' loans for margin purposes. Only $1.8 billion came from banks while the remaining amount came from who?
$8.5 billion

non-bank lenders, usually corporations with extra funds
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Why are call loans bad for the stock market?
When the stock prices dip, corporations call the loans causing borrowers to sell stock which decreases the stock price causing an endless cycle
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Were call loans helpful in fueling the bull market?
According to White, they weren't.  From 1922 to 1929, the demand for loans increased dramatically, causing call loan rates to increase.  This drew more credit into the marketplace.
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What were the harbingers of the Stock Market crash?  Where was the peak? 
In the Fall of 1929, Consumer durables output fell.

In the Summer of 1929, nondurables output began to fall.

In September 1929, the market peaked.
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At first, they declined slowly and kept a normal trading volume, but in mid to late October 1929, stock prices began to decline rapidly.  On "Black Thursday" (10/24)            million shares were traded, which was 4x more than normal.
13 million shares traded
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On Black Tuesday (10/29),          million shares were traded and the average stock price fell by XX%.  In November, Stock prices were 1/2 of the August values.
16 million shares

25% fall in stock prices on average
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If you bought stock in 1926 and sold in late 1930, on average how much would you lose?
Trick question!  You wouldn't (more than likely) because throughout 1930, stock prices remained above the 1926 level.

You would actually make money (on average).
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The lowpoint in the market was in July of              (year).  Any investment of $1000 in 1926 would be worth what?
1932

$360
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T/F: The Stock market crash was the cause of the Great Depression.
False - it was a symptom that worsened it, but not the cause.
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What do most economists believe caused the economy to go from a recession to a depression?
bank failures
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The 1st wave of bank failures happened in                        .  Mostly small, rural banks in the                     and                  failed.  The Bank of the United States failed, causing confusion because of its name even thought it had no connection to the government at all, and was the largest bank to have failed up to that point.
Late 1930

South and Midwest
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What did the Fed do about bank failures?  What did this cause solvent banks to do and what were the effects of it?
The Fed did nothing, even though it should have acted as a lender of last resort.

Banks "shored up" reserves by reducing outstanding loans.
This decreased M,
which decreased C and I,
which decreased the GDP. (M=kPY)
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The second wave of bank failures came in                             of              .   Several large international banks in                and                    were failing.  On top of this, Britain left the                                        , which fueled panic.  How did Britain's decision effect the US?
Spring/Summer of 1931

Austria and Germany

Gold standard

Britain was the model for a sound banking system, so when they stopped payments in gold for paper money, people began to worry.  They hoarded gold, which decreased the amount of money in banks which in turn decreased M that led to greater decreases in P and Y.

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From 1930-1932,                banks closed with deposit losses of around $X billion.  What was the Fed's response?
5,000 banks closed

losses of $3 billion (7% of total deposits)

The Fed did nothing.
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The third wave of bank failures happened in                          .  This was the worst run yet with                 banks closing and total deposit losses of $           billion.  What was the Fed's response?
early 1933

4,000 banks closing

total deposit losses of $3.5 billion

The Fed actually INCREASED the DR.  This was the exact opposite of what they should have done. It further reduced M.
48
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In March of 1933, FDR imposed a 1-week bank holiday.  Explain the holiday.  What was its impact?
Banks shut down for 1 week and the government took that time to inspect them for solvency. If they weren't solvent, they wold be dismantled in an organized way so that as many depositors as possible got repaid.

Impact: It worked!  Restored confidence in the banking system.
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How did FDR end Gold hoarding?
He made it illegal!  While hard to enforce, many people actually turned in gold for paper money.  People were desperate, so they followed FDR's requests. 
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In January of 1934, the FDIC was established.  What was its general purpose?
It decreased the incentive for depositors to join a bank run.
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From 1934 on, less than            banks failed per year.
less than 100 per year
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According to the Monetarist Interpretation of the Great Depression, what was the primary cause?  What caused the decrease in M?  Monetarists view the higher ratio of money to GDP as evidence of what?
Primary cause: Decline in M

banks surviving bank failure increased their reserve holdings.

High money to GDP ratio is evidence of hoarding.
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What is the main criticism to the Monetarist point of view? What is the Monetarist response?
Criticism: The ratio of money to GDP is low, but why is it increasing?  Money supply is decreasing slower than GDP, so there should be enough money to support the level of output.

Response: There was money, it just wasn't circulating.  Money supply figures can't account for this.
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According to Monetarists, what two things did the Fed fail at that affected the depth and duration of the Depression?
1) failed at Lender of Last resort
2) failed at using Expansionary monetary policy
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The Fed increased the DR        times in an effort to do what?
3 times

to decrease speculation and margin loans
56
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Why were the Fed's purchases of treasury bonds ineffective?
Too little too late

Modest purchases were made in late 1929 and a $1.1 billion purchase was made in 1932.
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Why was their a power struggle between the NY Fed branch and the Fed board of directors?  Who was Benjamin Strong?
The NY branch was protesting for expansionary monetary policy while the Board refused.

Benjamin Strong was the former president of the NY Fed and preached expansionary policy, but died in 1928. 
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The 1932 Federal Reserve Annual Report proved that the Board of Directors didn't understand the magnitude of the problem.  While they had good data, they were looking at the                1           interest rate, which was decreasing.  They should have been looking the             2              interest rate, which was increasing.  In addition to this, the Fed was concerned that buying bonds would do what (2 things)?
1) Nominal

2) Real

Reason 1) Fed was concerned that buying bonds would decrease gold supplies, possibly taking the Fed off the gold standard.

Reason 2) Fed was concerned that buying bonds would reduce the necessity for DR commercial borrowing, which would reduce interest payments to the Fed.
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According to the Keynesian Interpretation of the GD, what was the primary cause? 
A sudden decline in Consumption (and or Investment spending) caused by the decline in the consumer durables and agricultural sectors.

Basically, the decline in M was a symptom rather than a cause of the GD.
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T/F: Keynesians assume that the price of money = real interest rate.
False - nominal interest rate
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T/F: The Keynesians acknowledge that M decreased, but say the decrease in money demand > decrease in money supply (M).
True
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Why did Temin ultimately side with the Keynesian interpretation?
Since interest rates fell and the Keynesian approach accounts for that, they are correct.  For Monetarists to be correct, the interest rate would have had to rise.
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In short, Monetarists say what about the Supply and Demand of Money?  Keynesians?
Monetarists: Supply decreased greater than demand.

Keynesians: Demand decreased greater than supply.
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What is the Monetarist response to Temin's critique?
Real interest rates are what matters because they are what affect lender/borrower decision making, and it was clearly rising.

Since the price level was decreasing, the purchasing power of money increased, so the interest rate should be increasing.
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What does the Debt Deflation Interpretation, by Fisher and Bernanke, say was the primary cause of the GD?
Primary cause: failure of credit markets - AI and Long-term relationships b/w lenders and borrowers
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What are the two solutions to the "Asymmetric Information" problem?
1) Collateral
2) Long-term relationship b/w borrowers and lenders - small loans at first, then when a business establishes credit worthiness loans increase.
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According to the Debt Deflation Interpretation, why did credit markets slow or crash (2 reasons)?
1) Stock market was declining, so collateral was limited

2) banks severed long term relations and raised interest rates, limiting access to credit for households (making it difficult to spend)
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T/F: Monetarists believe that the price of money is equal to the Price level. 
False- equal to the inverse of the price level
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What was the effect of deflation on debtors?
Deflation harms borrowers (b/c they have to pay back more value), so firms and households didn't want to take on existing debt when their current debt was becoming more burdensome, so there was no investment spending.
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What did the National Labor Relations Board do and what did it make illegal?
protects workers' right to strike and lobby firms

yellow dog contracts are made illegal
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From 1910 to 1930, HS graduation rates jumped from roughly 10% to what?
50%
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T/F: the Midwest led the way in encouraging students to finish Highschool.
True
73
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The Emergency immigration Act said that the number of people that could immigrate from any country was....
This act was amended in 1924 to what?
3% of the people who already lived in the US in 1910

Amended to 2% of 1890 levels
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T/F: Immigration restrictions were successful.
True
75
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After the golden age of agriculture ended in 1914, prices for agriculture products fell because of                                   .
adverse terms of trade
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Had the McNary-Haugen bills passed, they would have done what two things?
1) returned terms of trade to pre WWI levels

2) implemented tariffs to imported crops
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What did the Capper-Volstead Act do?
exempted farmers from anti-trust laws
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What did the Agricultural Marketing Act do?
made the Gov responsible for stabilizing farm prices using non-government companies (encouraging coorperative marketing associations)
79
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What did the Smoot-Hawley Tariff Act do?
tariff to protect farmers from cheap imports of agricultural products
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Were the rich getting richer and the poor getting poorer?  What did Charles Holtz say?
Yes: The rich weren't spending enough money to keep aggregate demand up.
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What did the Dawes plan do?
provided a large loan to the German economy to help stabilize it.
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What did the Young Plan do?
reduced the size of payments from Germany
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When Roger Babson warned of a stock market crash in September of 1929, it was called the "                         "
"Babson Break"
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T/F: While Smoot-Hawley tariff had the effect of adding jobs for domestic workers, in the end its reduction of imports and the retaliatory tariffs it inspired made the Great Depression worse.
True
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What has been the US's Average GDP growth rate over the past 250 years?  What about GDP per capita?
RGDP growth rate: 3%

Per capita growth rate: 2%
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T/F: According to the "GDP Mirage" article, Investment spending is MORE important than tangible spending.
True
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Were the rich getting richer while the poor got poorer?  What did Gene Smiley say?
No: the distribution of income came from lower taxes for the rich and more investments in taxable securities by the poor.  Even if they were getting poorer, most had an increased standard of living.
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In terms of Price, Quantity and Average Total Cost (ATC), what does profit equal?
Profit = (P-ATC)Q
Flashcard set info:
Author: savhighsmith
Main topic: Economics
Topic: History of Economics
School / Univ.: UGA
City: Athens
Published: 11.12.2010
Tags: Myra Moore Nick Huddleston
 
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