2.6.2 - Great Depression/2008 Financial Crisis Flashcards
what fiscal policy was used in response to the great depression?
-1920s governments were focussed on balancing the budget (classical economics), governments cut spending and reduced tax as higher borrowing would lead to crowding out, reducing AD
-Keynes argued for expansionary fiscal policy, increased gov spending to increase AD and GDP
-1933-1938 = New Deal Programme in America stimulated output and employment
-1934 = Britain boosted government spending
-tight fiscal policy = fiscal prudence in US
what monetary policy was used in response to the great depression?
-UK was on Gold Standard until 1931, US until 1932 = currency was fixed as a certain amount of gold
-Britain was on Gold Standard to stabilise inflation and restore current account equilibrium however deflation occurred, leading to increased interest rates, further weakening AD
-it wasn’t possible to reduce interest rates as this would decrease demand for currency and they would be unable to maintain gold standard
-September 31 = interest rates needed to be increased to maintain the value of the dollar, causing a negative multiplier reducing C and I, exacerbating depression
what policies did the US use in response to the great depression?
-increasing tariffs to protect US industries, led to trade war, trade contracted, output fell
-the US believed in balanced budgets, they adopted the Gold Standard limiting the ability of central banks to expand money supply
-in 1930, there was a budget surplus. by 1932, fiscal policy was weakly expansionary
-interest rates were raised in 1931 restricting credit and reducing AD, money supply fell by 31%
-1933, New Deal launched bringing some fiscal stimulus to the economy
-Roosevelt removed the Gold Standard and money supply increased, increasing real GDP, causing economic growth
-1937, government spending was cut and taxes raised due to national debt
what policies were used by the UK in response to the great depression?
-UK Treasury followed classical doctrine that budget should be balanced until 1940s. unemployment rose so spending increased and tax revenues fell
-1931 budget cut public sector wages and unemployment benefits by 10%, raised income = highly deflationary
-UK left Gold Standard (1931), value of the pound fell by 25%, money supply was relaxed. Interest rates were reduced from 6% to 2%.
How was fiscal policy used in the US in response to the 2008 financial crisis?
American Recovery and Reinvestment Act in 2009, worth 6% of the year’s GDP. 90% of the budgetary impact was realised by 2011. The act included tax cuts for businesses, spending on public services and training for the unemployed
how was fiscal policy used by the UK in response to the 2008 financial crisis?
fiscal measures worth 2.2% of 2009 GDP eg. reduced VAT, support for construction industry, infrastructure spending, training for unemployed. by 2010, the UK moved towards measures aimed at reducing the budget deficit
what did Keynesians argue about fiscal policy as a response to the crisis?
Keynesians argued that governments had to spend more to stimulate recovery and most countries put stimulus packages in place
what monetary policy was used by the UK in response to the 2008 financial crisis?
the mpc cut base interest rate from 5.75% to 0.25% between 2007 and 2009. this stimulated AD. QE was also used to revive consumer spending and economic growth. The Bank of England spent £375 billion on QE. (expansionary monetary policy)
how was monetary policy used in the US in response to the 2008 financial crisis?
Federal reserve cut interest rate from 5.25% to 0.25% in 2008, they spent $4.5 trillion on quantitative easing. (expansionary monetary policy)
How were the fiscal policy responses different for the US and UK (2008 Financial Crisis)?
US fiscal policy was looser than that of the UK however their budget deficit was larger as a percentage of GDP than the UK. UK prioritised cutting the fiscal deficit to control National Debt by reducing government spending and raising taxes, reducing economic growth so they took longer to recover from the recession
