CH19 - 19 BIGEVENTS:THEECONOMICSOF D EPRESSION,H YPERINFLATION,AND D EFICITS FOCUSOFTHECHAPTER Inthischapter we revisit the time period which gave

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19 B IG  E VENTS : T HE  E CONOMICS   OF   D EPRESSION , H YPERINFLATION AND   D EFICITS FOCUS OF THE CHAPTER • In this chapter  we revisit the time period  which gave birth  to modern  macroeconomics: the   Great Depression.  We examine the role that both monetary  and  fiscal policies played  in its   beginnings, its continuation, and  our ultimate recovery  from it. •  We also examine the link between  money  growth  and  inflation in normal  business cycles and   in hyperinflations.  A variety of policy responses  to hyperinflation  are reviewed; the necessity   of stabilizing  government  budget  deficits in hyperinflationary  economies is emphasized.   • The U.S. budget  deficit is examined  in some detail.  There is a brief discussion  of the national   debt. SECTION SUMMARIES 1. The Great Depression: The Facts The Great Depression  began  just before the infamous  stock market  crash of September  1929, and,   fueled  by large-scale bank  failures that caused  an immense  decline in the money  supply, lasted   until the end  of 1941 when  the U.S. entered  World  War II.  Unemployment  averaged  18.8 percent   between  1930 and  1941, and  reached  a high of 24.9 percent  in 1933.  Net investment  was negative   between  1931 and  1935.  Output  fell nearly 30 percent  between  1929 and  1933.  The consumer   price index fell almost 25 percent.  The stock market  declined  an astounding  85 percent  between   the crash of September  1929 and  June 1932. Because the federal government  in the mid-1930s was worried  about  balancing  the budget,   federal state and  local fiscal policies were actually contractionary  between  1932 and  1934, exactly   204
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205 C HAPTER  19 opposite of what  was needed.  President  Roosevelt’s “New  Deal,” often credited  with  pulling  the   U.S. out of the Great Depression, actually wasn’t expansionary  at all.  A number  of institutional   changes, however, were made  during  Roosevelt’s first term: the Federal Deposit Insurance   Corporation  (FDIC) was created  to supervise banks and  insure bank  deposits; the Securities and   Exchange Commission  (SEC) was established  to regulate the securities industry; and  the Social  Security Administration  was set up  so that the elderly would  not have to rely on savings to  finance their retirement.  These changes were all viewed  as potentially stabilizing, and  all of  them  have persisted  to this very day. Many  economists, however, give credit to the bombing  of  Pearl Harbor  and  the subsequent  entry  of the U.S. into World  War II for our eventual  victory   over the Great Depression.    
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This note was uploaded on 12/02/2011 for the course ECON 209 taught by Professor Dr.martin during the Spring '09 term at Charleston.

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CH19 - 19 BIGEVENTS:THEECONOMICSOF D EPRESSION,H YPERINFLATION,AND D EFICITS FOCUSOFTHECHAPTER Inthischapter we revisit the time period which gave

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