GFC + Great Depression Policy Flashcards
(12 cards)
What protectionist fiscal measure did President Hoover introduce in 1930, and how did it affect aggregate demand?
In 1930, Hoover significantly raised tariffs (Smoot–Hawley) to protect U.S. industries. This triggered retaliatory tariffs abroad, causing world trade to contract sharply and reducing U.S. export earnings—thereby deepening the fall in aggregate demand.
Describe the U.S. fiscal stance in 1930–32 and explain its impact on the Depression
Believing in balanced budgets, Hoover ran a surplus in 1930 and only provided a weakly expansionary budget in 1931–32. Given GDP collapsed, this tight fiscal stance meant there was negligible stimulus—prolonging and deepening the Depression.
What was the New Deal’s fiscal response after 1933, and to what extent did it boost aggregate demand?
From 1933, Roosevelt’s New Deal raised federal spending to about 10.7 % of GDP (in 1934), financing large public‑works programs, welfare, and job creation. Combined with abandoning the Gold Standard (which expanded money supply), annual real GDP grew over 9 % from 1933–37—though debate remains on the New Deal versus war spending as the primary driver
How did the U.S. monetary authorities’ handling of the Gold Standard in late 1931 affect credit conditions?
In September 1931, to defend the dollar’s gold peg, the Fed raised interest rates. This further restricted bank lending when credit was already drying up. Money supply then fell by roughly 31 % between 1929–33, exacerbating the demand collapse.
Explain why the U.S. experienced a recession in 1937–38 despite earlier recovery
Concerned about high federal debt, Roosevelt cut New Deal spending and raised taxes in 1937. Simultaneously, the Fed increased bank reserve requirements, causing money supply to contract. The combined fiscal and monetary tightening pulled aggregate demand back down, triggering a sharp downturn
What fiscal measures did the U.K. government take in 1931, and why were they deflationary?
To balance the budget, the 1931 U.K. budget cut public‑sector wages and unemployment benefits by 10 % and raised the basic income tax from 22½ % to 25 %. As unemployment was rising and tax revenues were falling, these cuts reduced disposable incomes—contracting consumption and deepening deflationary pressure
How did leaving the Gold Standard in 1931 serve as a monetary policy response in the U.K., and what were its immediate effects on aggregate demand?
In September 1931, the U.K. abandoned the Gold Standard, causing the pound to depreciate by about 25 %. The Bank of England then cut interest rates from 6 % to 2 %, which expanded money supply. Cheaper borrowing and a weaker pound boosted net exports—jump‑starting the recovery.
Summarize the U.S. fiscal response to the Global Financial Crisis under the American Recovery and Reinvestment Act (ARRA).
Signed in February 2009, ARRA was roughly $787 billion (≈ 6 % of 2009 U.S. GDP). It combined tax cuts (for households and businesses) with spending on health, education, social security, infrastructure, and renewable energy. Over 90 % of its budgetary impact was realized by end‑2011, aiming to offset collapsing private demand.
What fiscal measures did the U.K. introduce in late 2008/early 2009, and how large were they relative to GDP?
The U.K. injected roughly 2.2 % of 2009 GDP through: a temporary VAT cut from 17.5 % to 15 %; support for construction and housing markets; public‑sector infrastructure spending on schools/hospitals/green energy; and training programs for the unemployed. By 2010, however, the U.K. shifted toward deficit‑reduction measures.
Detail the Bank of England’s monetary policy path from 2007–2009 during the Global Financial Crisis.
From 2007’s 5.75 % base rate, the BoE cut rates in stages down to 0.5 % by March 2009. Once the base rate hit 0.5 %, the MPC resorted to quantitative easing (QE) because conventional rate cuts could no longer stimulate borrowing effectively. By 2014, QE totaled £375 billion
How did the Federal Reserve’s monetary policy evolve from 2007–2008, and what was the scale of its QE programme by 2014?
The Fed reduced the federal funds rate from 5.25 % (2007) to 0–0.25 % by December 2008. After hitting the zero lower bound, it launched multiple QE rounds (QE1, QE2, QE3). By October 2014, the Fed had purchased about $4.5 trillion in assets to lower long‑term rates and support credit availability.
In what ways did quantitative easing aim to boost aggregate demand during the Global Financial Crisis?
QE involved central‑bank purchases of long‑term bonds:
- Lowered long‑term yields, reducing borrowing costs for firms and households.
- Expanded the monetary base, offsetting the zero lower bound on short‑term rates.
- Weakened the currency, making exports more competitive.
Together, these effects were intended to encourage lending, investment, and spending.
