Final_review

Final_review - Announcements Two sample finals posted on...

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1 Announcements • Two sample finals posted on the course website. • Extra office hours tomorrow (Friday) from 9:30 to 11:30 in 9383 Bunche Hall • Exam will be held in WGYOUNG CS76 on Monday, March 16 th from 3-6pm. Lectures 10-11: Great Depression • Largest business cycle event in US history: GDP declined by 33% over 5 years. Combination of large declines in investment and (unusual) declines in household consumption. • We evaluated possible causes of the downturn, beginning with the stock market crash of 1929. The market declined by 50%. • Perhaps falling wealth led to falling consumption? But: only 16% of households had any money invested in stocks. Perhaps uncertainty encouraged households to hold back on purchases of durable goods. But: durables only account for 10% of all consumption.
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2 An alternative view: Bank panics • Series of bank failures in 1930. Depositors withdrew funds from other banks in fear. • Size of the money stock = money multiplier * base. Multiplier is a positive function of the deposit-to-currency ratio (D/C). Why? Money in the bank can be re-circulated as loans. • Perhaps shrinking supply of money increased interest rates and reduced investment? Stock market crash or bank panics? Distinguishing between causes • If stock market crash reduced demand for investment, we would expect the interest rate to fall. Why? Think about the investment and savings market (IS curve). For a given supply of savings, if the demand for investment projects falls, the price of borrowing will fall. • If the bank panics reduced the supply of money, we would expect the interest rate to rise. Why? Think about the market for money (LM curve). For a given demand to hold money (for purchases), if the supply of money falls, the price of holding money rises.
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3 Interest rate evidence Source: Atack and Passel Stock market crash Bank panics Additional cause: Debt-deflation • Price level declined by 25% from 1929-32. In part, prices fell as demand for consumption and investment declined. Price declines were augmented by adherence to the Gold
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Final_review - Announcements Two sample finals posted on...

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