ECON 2200 Moore 4

ECON 2200 Moore 4 - 87-157-4ECON 2200 Moore Test #...

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Unformatted text preview: 87-157-4ECON 2200 Moore Test # 4WednesdayNovember 14In addition to the structural weaknesses of the 1920s economy, there were other factors that led to the economic decline of the 1930s. The Smoot-Hawley Tariff (June 1930) was a very high, general tariff on imports. This was the last broad tariff the US imposed. Economists were almost completely opposed to the tariff; in fact, 1,000 economists presented a petition to Hoover to veto the act.Economists are generally opposed to tariffs because they (tariffs) ignore the principles of comparative advantage and gains from trade. Also, a high tariff will increase the price of imports, lowering demand and affecting the income of other countries. As other countries have less income, demand for our goods in other countries will in turn be lower. They can also lead to retaliatory tariffs, further lowering the demand of US exports.Hoover signed the law anyway, and the economists theories proved correct. US imports decreased and exports mildly decreased. Student Notes Reproduction Prohibited.187-157-4At this point, international trade was not a big enough part of the US economy to severely affect the country or cause a depression. In 1930, exports accounted for 6% of the US GDP and imports were 5%.This added to the Depressions long feeling of pessimism that kept people from investing in the economy, causing the length of the economic trouble.The 1920s economy is sometimes referred to as The Great Bull Market. Income was increasing with the rise of the middle class, who had more disposable income. Prior to the 1920s, there was very little investing from the middle class.Stock prices were rising rapidly because business conditions were strong and earnings were up. Dividends were rising, and as stock prices rose, firms were achieving capital gains. These factors were especially prevalent during the late 1920s and through the first three quarters of 1929. Stock prices, however, rose faster than earnings. This is called a speculative bubblewhen the price of an asset increases because people believe that its price will continue to increase (and thus the benefits received, in this case, earnings, will continue to increase) Student Notes Reproduction Prohibited.287-157-4The price of stock reflects the discounted value of the expected stream of future dividends, by economic theory....
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ECON 2200 Moore 4 - 87-157-4ECON 2200 Moore Test #...

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