Lecture 22 - Key Terms and Questions

Question 1

Keynesians argued that the reason why deficit spending did not “work” (eliminate unemployment) in the 1930s but did work in World War II was that wartime deficits were ____.

Answer 1

much bigger

Question 2

Keynesians argued that the reason why increases in the stock of money did not “work” (eliminate unemployment) in the 1930s but did work in World War II was that wartime increases in the stock of money were ____.

Answer 2

accompanied by an expansionary fiscal policy

Question 3

Consider the following diagram which shows the supply of labor as a function of the wage and the demands for labor in 1929 and 1933. It shows the hypothetical situation after the stock market crash and banking panic had reduced demand, but before the labor market had begun to adjust.

What did Arthur C. Pigou think would happen in this labor market?
What did John Maynard Keynes think would happen in this labor market?

Answer 3

• Pigou though lowers wages and price level would allow for full employment
• Keynes thought that real wages would be the same if we lower both wages and price level.
  
  • if we followed pigou demand would fall
  • we would need to increase government spending
  • supply would increase

Question 4

The famous Glass Steagall Act _____.

Answer 4

separated commercial banking from investment banking

Question 5

In the 1930s proponents of the theory of secular stagnation argued that the Great Depression lasted so long because ____.

Answer 5

all the big investment projects had been completed

Question 6

One of the important reforms of the Great Depression was the widespread adoption of amortized home mortgages. This meant that for the first time _____.

Answer 6

homeowners would pay off part of the principle of their loan each year

Question 7

Who is this guy? Why was he mentioned during the lecture in the same breath as the song “Brother Can You Spare a Dime?”

Answer 7

• Famous modern ecnoomist
  
  • believes the “secular stagnation” is returning
  • investment in technology is stagnating in returns for growth, therefore the government should increase spending (spare a dime).

Question 8

The Glass-Steagall Act was repealed in 1999. Name one important provision of the Glass-Steagall Act. And name one reason why your professor thinks that the repeal of the Act did not cause the Panic of 2008.

Answer 8

• Seperated commercial and investment banks.
• The banks responsible for 2008 were seperate, investment banks.