Lecture 4 - Roosevelt and the New Deal

Question 1

When did the Great Depression occur and what was it triggered by?

Answer 1

The Great Depression occurred from 1929-1939 and it was triggered by the 1929 stock market crash

Question 2

What were some of the societal issues during the great depression?

Answer 2

• There was massive unemployment, poverty and deflation
• The economy faced radically low demand with significant impact on households and firms

Question 3

Explain the purpose of Roosevelt’s New Deal Policies

Answer 3

Roosevelt’s New Deal Policies aimed to:
1- Revitalise the US economy
2- It was based on the 3 R’s program: Relief, Recovery and Reform
3- There was government intervention to address market failures and stimulate demand

Question 4

Explain the 3 R’s program

Answer 4

It stands for Relief, Recovery and Reform

Relief:

1- Immediate action to halt economic deterioration (eg. Civilian conservation corps, public work projects).

2- Direct assistance to the unemployed and poor

Recovery:

1- Temporary programs to restart the economy

2- Banking reforms and public spending to stimulate demand

Reform:

1- Long-term structural reforms to prevent future depressions (eg. Social security act){

2- Regulation of banks and markets to stabilize the financial system

Question 5

Prior to Keynes, which view was in motion in the US economy?

Answer 5

Prior to Keynes the Classical View was in motion

Question 6

Explain the Classical View of the economy

Answer 6

Classical view: Natural balance of demand and supply would maintain equilibrium without government intervention

Question 7

Explain how the classical view suggested that market demand should be managed

Answer 7

The Government should step in to boost demand through spending and policies, filling the gap left by households and businesses

Question 8

During the Great Depression, why was the classical view questioned?

Answer 8

During the Great Depression, the low private sector demand questioned the classical view

Question 9

What are the drawbacks of the government aiming to manage demand given by the classical view?

Answer 9

• Limited information – Government may struggle to determine the exact level of spending needed to bring the economy to equilibrium. There is a risk of spending too much (inflation) or too little (persistent recession)
• Deficit Financing – Borrowing to finance government spending may lead to higher debt levels. Risk: Deteriorating fiscal position could undermine investor confidence and limit the government’s ability to borrow

Question 10

What does fiscal policy involve?

Answer 10

• Spending
• Taxation
• Borrowing

Question 11

What is the relationship between government spending and recessions?

Answer 11

Government Spending is crucial during recessions to stimulate the economy (eg. Infrastructure projects and social programs)

Question 12

How can the government spending during a recession be financed?

Answer 12

This government spending can be financed by two ways: Taxation and borrowing

Question 13

What is the benefits of financing government spending through taxation?

Answer 13

Taxation: Raises revenue but can reduce private sector demand

Question 14

What are the benefits and drawbacks of financing government spending through borrowing?

Answer 14

Borrowing: Allows immediate spending but increases national debt

Borrowing in recessions is essential to maintain economic activity. However, excessive debt can erode investor confidence in the government’s ability to repay leading to a debt crisis

Question 15

What are some of the problems policymakers face during recessions regarding government spending?

Answer 15

1- Uncertainty in demand: It is difficult to assess how much government spending is needed to restore equilibrium in the economy

2- Debt Financing: Rising debt levels could strain the government’s fiscal position and trigger a crisis if investors lose confidence