Deck 23: The Great Depression

Question 1

Britain 's departure from the gold standard in September 1931 ____ bank closures in the United States because ____.

A) decreased, the British decided to invest their gold in the U.S.
B) increased, anyone who wanted gold had to withdraw it from U.S. banks.
C) decreased, Britain could now follow expansionary monetary policies at home.
D) increased, people realized that the United States was about to "bail out" Britain with large loans.

Answer 1

increased, anyone who wanted gold had to withdraw it from U.S. banks.

Question 2

At its maximum during the Great Depression unemployment reached approximately ___ percent of the labor force?

A) 15
B) 25
C) 50
D) 75

Answer 2

25

Question 3

During the Federal Bank Holiday ordered by President Roosevelt and the week that followed it,

A) new supplies of gold were distributed to the banks.
B) a national monetary commission was set up.
C) the banks were inspected.
D) actions were taken to take the US off the gold standard
E) Both c and d are correct.

Answer 3

Both c and d are correct.

Question 4

During the 1930s, banks found it hard to solve the asymmetric information problem between borrowers and lenders, because ____.

A) Many borrowers lacked adequate collateral.
B) Changing federal bank regulations created uncertainty
C) The fall in the stock of money reduced aggregate demand.
D) Interest rates had fallen to "liquidity trap" levels.

Question 5

Between 1929 and 1933, nominal interest rates ___, and real interest rates ___.

A) rose, rose.
B) rose, fell.
C) fell, rose.
D) fell, fell.

Question 6

The first banking crisis of the 1930s was probably caused by

A) low farm prices.
B) the stock market crash.
C) antagonism between Wall Street banks and Main Street banks.
D) Bank of England attempts to preserve the gold standard by raising interest rates.

Question 7

Which of the following most accurately describes the changes in GDP and unemployment between 1929 and 1933?

A) Real GDP changed little but the unemployment rate increased to about 50%.
B) Real GDP increased by about 10% and the unemployment rate decreased to about 3%.
C) Real GDP decreased by about 30% and the unemployment rate increased to about 25%.
D) Both Real GDP and the unemployment dropped significantly.

Question 8

Which was not a factor in causing the Great Depression?

A) the end of a boom in construction
B) the crash of the stock market
C) a struggling agriculture sector
D) structural weakness in the banking system
E) All of the above were factors causing the Great Depression.

Question 9

During the Great Depression, real GDP decreased by roughly ____ percent and unemployment rose to roughly ____ percent.

A) 5; 10
B) 20; 10
C) 30;25
D) 50;25

Question 10

In the United States in the 1920s, there were many bank failures in ___ areas, as the result of ___.

A) rural, high levels of indebtedness taken on in WWI.
B) rural, pro-urban Federal spending policies.
C) urban, lack of demand from the lower middle class for industrial products.
D) urban, pro-rural Federal spending policies.

Question 11

The failure of the Bank of the United States in December 1930 probably intensified the banking panic for each of the following reasons except that it proved that ___

A) the Fed might fail to act as a lender of last resort.
B) big banks could fail.
C) New York Banks could fail.
D) that Wall Street banks could fail.

Question 12

During the 1930s,

A) ordinary citizens were not allowed to hold gold.
B) the US government fixed the price at which the Treasury would by and sell gold.
C) production of gold soared.
D) All of the above are correct.
E) Only a and b are correct.

Question 13

What is the best description of the US economy from 1929-1940?

A) GNP decreased continually during the greatest Depression our nation has known.
B) The economy suffered a large drop from 1929-1933, but then grew steadily through WW II.
C) The economy suffered an initial drop, a four-year expansion and then another drop towards the end of the decade.
D) The unemployment rate increased steadily throughout the period.

Question 14

In the year after the stock market crash of 1929, stock prices on average ___.

A) were lower than they had been in decades.
B) were lower than in 1929 but higher than in the mid-1920s.
C) rebounded to a level higher than in 1929.
D) cannot be reliably calculated because no buyers could be found for many stocks, and hence no prices were reported.

Question 15

During the Federal Bank Holiday ordered by President Roosevelt

A) new supplies of gold were distributed to the banks.
B) a national monetary commission was set up.
C) the banks were inspected.
D) the leadership of the Federal Reserve System was replaced.

Question 16

In the year after the stock market crash of 1929, stock prices on average ___.

A) were lower than they had been in decades.
B) were lower than in 1929 but higher than in the mid-1920s.
C) rebounded to a level higher than in 1929.
D) cannot be reliably calculated because no buyers could be found for many stocks, and hence no prices were reported.

Question 17

According to Walton and Rockoff, which of the following was the most important in bringing the banking crises of the 1930s to an end?

A) the elimination of many weak banks through bankruptcy (survival of the fittest).
B) the promise of federal bank deposit insurance.
C) New Deal spending programs.
D) World War II.

Question 18

The aspect of the Second Banking Crisis of the 1930s that distinguished it from the First Banking Crisis was that during the second crisis ___.

A) the Federal Reserve finally decided to act as lender of last resort.
B) the stock market boom finally came to an end with the crash.
C) banks in all regions of the country failed.
D) President Roosevelt asked Congress to establish Federal deposit insurance.

Question 19

What best explains the pattern of bank collapses in the US?

A) The vast majority of banks closed early in the decade and the closing dropped significantly in the latter half of the decade.
B) Banks collapsed consistently throughout the 1930s
C) The failure rate was relatively low early in the decade and grew steadily throughout the period.

Question 20

The Stock Market Crash of 1929 probably contributed ____ to the Great Depression because _____.

A) little, it did no more than wipe out the speculative gains made earlier.
B) little, the Fed responded by increasing the money supply.
C) a good deal, corporations could no longer raise investment funds.
D) a good deal, consumer confidence and spending on durables were reduced.

Question 21

One reason the Federal Reserve Board in Washington did not act as a lender of last resort during the early years of the Great Depression, was its power struggle with ____.

A) U.S. Treasury.
B) foreign central banks.
C) Federal Reserve Bank of New York.
D) President Roosevelt.

Question 22

The Smoot-Hawley Tariff

A) was a major cause of the Great Depression.
B) was the last of America's high "protective" tariffs.
C) made a bad situation slightly worse.
D) caused a psychological effect that destroyed the banking system.
E) Only b and c are correct.

Question 23

Some have argued that the Federal Reserve looked at the wrong indicator of monetary policy, and that the Fed mistakenly thought that monetary policy was "easy" because ______.

A) the stock of money had grown rapidly.
B) the monetary base had grown rapidly.
C) market interest rates were low.
D) bank reserve ratios were low.

Question 24

According to the Keynesian interpretation of the 1930's, the main reason we still had double digit unemployment in 1939 was that

A) interest rates were too high.
B) federal budget deficits were too small.
C) the stock of money was too small.
D) investment spending was too high.

Question 25

Walton and Rockoff contend that the likelihood of a Great Depression happening again is _______ because (among other reasons) _______.

A) substantial, our continued dependence on a highly volatile stock market.
B) substantial, of our reliance on a fractional reserve banking system.
C) remote, policymakers are unlikely to repeat the mistakes of the 1930s.
D) remote, industry now makes up a much larger share of GNP than it did in the 1930s.

Question 26

Walton and Rockoff contend that a repetition of the Great Depression is unlikely for all of the following reasons except ____.

A) the Federal Reserve is unlikely to repeat the mistakes it made in the 1930s.
B) the private sector is less vulnerable now because the industrial sector is relatively smaller.
C) government programs exist that would ameliorate suffering and inhibit the spread of a crippling panic.
D) the public is unlikely, even in a depression, to vote for a radical government that would frighten business and inhibit investment, the way it did in the 1930s.

Question 27

Anna Schwatz and Milton Friedman have argued that the Great Depression was caused by

A) the fall in the stock of money.
B) the fall in consumer durable spending.
C) the fall in investment spending.
D) the increase in nominal wages.

Question 28

According to Walton and Rockoff, the recession of 1937 and 1938 could be attributed to ______ and ______.

A) the decline in world trade fostered by German and Japanese policies of self sufficiency, open market gold sales by the Federal Reserve.
B) increases in taxes, open market gold sales by the Federal Reserve.
C) increases in taxes, increases in bank required reserve ratios.
D) the decline in world trade fostered by German and Japanese policies of self sufficiency, increases in bank required reserve ratios.

Question 29

Which of the following "quotations", according to chapter 23, best summarizes Keynes conclusions about the lessons of the depression for the nature of capitalism.

A) "It is in determining the volume, not the direction, of actual employment that the existing system has broken down."
B) "An economic system that forgets to find work for millions of men and women, cannot be trusted to perform any task in an intelligent fashion."
C) "The depression is essentially a problem of reliance on a private banking system for the provision of an inherently public good, money."
D) "The rules of sound finance, namely stable prices and balanced budgets, apply as much to the present crisis, as they do in more pleasant times."

Question 30

What is the most compelling evidence for the Keynesian interpretation of the Great Depression?

A) Increases in both the interest rate and the quantity of money.
B) Decreases in both the interest rate and the quantity of money
C) An increase in the interest rate and a decrease in the quantity of money.
D) A decrease in the interest rate and an increase in the quantity of money.

Question 31

During the Great Depression, one reason the Federal Reserve did not respond forcefully was the "free gold problem," which refers to the idea that ___.

A) gold was fleeing Nazi Germany, thus undermining the Fed's attempt to control the money supply.
B) gold was essentially free because people had excess supplies of currency that could be converted into gold.
C) the Fed claimed that almost all its gold was tied up by reserve requirements (there was little free so it could not increase the money supply).
D) gold was essentially free because silver, which existed in abundance, could be converted into gold at the fixed rate of 16:1.

Question 32

What best describes state fiscal experience in the late 1920s and early 1930s?

A) Revenues dropped consistently through the period because less was being produced.
B) State spending decreased through the period.
C) The growth in state expenditures exceeded the growth of federal expenditures during the same period.
D) States either ran budget surpluses or fairly small deficits.

Question 33

Cole and Ohanian attribute the persistence of mass unemployment to

A) the lack of federal spending
B) the "stickiness" of real wages.
C) the rise in the money supply during the New Deal.
D) the fiscal recklessness of state governments.

Question 34

What best describes US federal fiscal experience in the late 1920s and early 1930s?

A) Revenues collected increased rapidly through the period.
B) A balanced budget was maintained for most of the Depression.
C) Tax rates were consistently lowered to spur economic growth.
D) Expenditures grew by over 300% from 1929 to 1940.

Question 35

According to Walton and Rockoff, Keynesian economists would probably argue that Keynesian policies failed to alleviate the Great Depression because _____.

A) monetary policy was contractionary.
B) government spending was disproportionately concentrated on poor relief.
C) supply-side shocks offset Keynesian policies.
D) Keynesian policies were never tried on a sufficient scale.

Question 36

Monetarists such as Milton Friedman blame the Great Depression primarily (although not completely) on ___.

A) the stock market crash.
B) the Bank Holiday.
C) the decline in investment spending.
D) the waves of bank failures

Question 37

In regards to the uncommon length of the Great Depression, both Schumpeter and Higgs contend that

A) private investment remained depressed in part due to the political climate created by the New Deal.
B) Social Security and the freedoms granted to labor, along with a progressive tax structure promoted growth in private investment.
C) the undistributed profits tax of 1936 encouraged businesses to undertake long-term investments.
D) the New Deal rhetoric from President Roosevelt, offered a pro-business slant that offended labor groups.

Question 38

According to Fed Chairman Bernanke's analysis of the Depression-era financial system,

A) bank lending was often based on long-term relationships between banks and customers
B) after the banking system collapsed, it recovered quickly due to government intervention.
C) bank lending at large was a severely depersonalized endeavor by 1925, which caused risky loan practices.
D) Both a and b are correct.