Final_review_fall2009

Final_review_fall2009 - Final exam review Exam rooms:...

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1 Final exam review • Exam rooms: Humanities A65 (if last name begins with A-L) and Humanities 169 (if last name begins with M-Z) • Final exam is cumulative. We will review the material after the midterm. • The final will have 4 questions (each of which may be multi-part). One question will definitely be on the material from before the midterm! Lectures 9-10: 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. • Possible causes of the downturn #1: Stock market crash of 1929. Market declined 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 Possible cause #2: 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? Alternatively: Decline in consumption reduced demand for holding money, thereby lowering the interest rate. Interest rate evidence Stock market crash Bank panics Conclusion: Interest rates continued to decline after bank panics. Suggests that money demand contracted by more than money supply. IR increase sharply in 1931… explanation? Gold standard.
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3 Additional cause: Debt-deflation • Price level declined by 25% from 1929-32. Price declines were, in part, a consequence of falling demand for consumption and investment. But deflation was an additional cause (accelerator) of the Depression. • Why? Deflation is costly for borrowers because debts are owed in nominal terms. Say you bought a house for $100 in 1928 and took out a $90 mortgage. In 1932, your house is suddenly worth $75 but you still owe $90! • We saw that household liabilities (in this case: $90 - $75 = $15) increased in 1930. If households respond by cutting back on consumption, the economy can falter. Why did the Depression last so long? Adherence to the gold standard prevented the use of expansionary
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This note was uploaded on 01/25/2010 for the course ECON 183 taught by Professor Boustan during the Fall '09 term at UCLA.

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Final_review_fall2009 - Final exam review Exam rooms:...

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