Microeconomics Special Topic 6—Lessons from the Great Depression
MULTIPLE CHOICE
1. “The Great Depression was caused by the 1929 stock market crash.” Which of the following is an
indication that this statement is false?
a.
The stock market had regained most of its losses from the October 1929 crash by April
1930.
b.
The recessionary conditions actually began in the mid-1920s before the stock market
crash.
c.
The Great Depression was a result of government failure to intervene in market activity.
d.
Economic theory indicates that a reduction in stock prices would reduce the consumer
price index and thereby stimulate output and employment.
2. Most economists believe the severity and duration of the Great Depression was primarily the result of
a.
the large budget deficits of the federal government.
b.
the reduction in tariffs and the influx of foreign imports during the early 1930s.
c.
the excessive use of credit cards.
d.
a sharp contraction in the money supply.
3. Which of the following resulted from the Smoot-Hawley trade bill of 1930?
a.
The stock market began a steady recovery from the crash of October 1929.
b.
Many countries responded by imposing higher tariffs on American products, and the
volume of international trade fell sharply.
c.
Imports decreased, while exports increased, resulting in an overall increase in GDP and
tariff revenues.
d.
The unemployment rate, which had been rising, began to steadily decline as jobs were
protected by the trade restrictions.
4. Which of the following was a result of the many programs introduced as part of the New Deal?
a.
a business environment of uncertainty that reduced output and investment
b.
a speeding up of the economic recovery process once these programs were enacted
c.
an increase in trade, investment, and output within the business sector
d.
a steady decline in the unemployment rate
5. Based on the experience of the Great Depression and the New Deal, which one of the following
strategies would be most likely to stimulate recovery from a serious economic recession?
a.
increase trade restrictions and tariffs to save jobs and enhance tax revenue
b.
a reduction in the money supply in order to strengthen the dollar and combat inflation
c.
keep taxes low in order to stimulate production and minimize the decline in personal and
business income
d.
institute frequent policy changes in order to search for and find the policy combination that
would be most effective
6. The Great Depression was an era marked by
a.
steady growth in GDP and a decline in the rate of unemployment.
b.
a prolonged period of high unemployment and output substantially below its potential.
c.
a large decline in the stock market followed by a steady recovery.
d.
a failure of expansionary monetary policy to stimulate output and employment.
7. The rapid growth in stock prices during the 1920s was due in large part to
a.
the expansionary monetary policy of the Federal Reserve.
b.
the wartime demand for military equipment and supplies.
c.
the artificially high value of the dollar, which eventually led to the stock market crash of
1929.
d.
the technological innovations of the decade, which spurred economic growth.
8. An analysis of large declines in the stock market since the Great Depression indicates that
a.
the stock market crash in October 1929 was more severe than subsequent crashes.
b.
a prolonged recession will always follow a large decline in the stock market.
c.
almost all stock market crashes since the Great Depression were followed by short
recessions of 12 to 18 months, and in some cases, no recession at all.
d.
the only way to recover from a stock market crash is through government spending,
increased regulation, and tax-increases.
9. Which one of the following was a secondary effect of the stock market crash of 1929?
a.
an increase in the money supply in the early 1930s
b.
a decline in consumption expenditures because of the reduction in the wealth of
stockholders
c.
an increase in the supply of loanable funds as people transferred funds from the stock
market into savings accounts
d.
an increase in tax revenues as the sellers of stocks paid the capital gains tax on stocks that
had appreciated during the 1920s
10. During 1929-1933, monetary policy was
a.
highly expansionary and this led to an increase in the general level of prices.
b.
characterized by steady monetary growth, which resulted in price stability.
c.
characterized by a sharp reduction in the supply of money, which led to downward
pressure on prices and a decline in output.
d.
highly expansionary and this led to a reduction in the general level of prices.
11. During the Great Depression of 1929–1933,
a.
the Fed allowed the money supply to contract substantially.
b.
the Fed increased the money supply sharply.
c.
Congress cut tax rates sharply.
d.
Congress cut tariffs substantially.
12. Which one of the following factors contributed to the decline in real output during the Great
Depression?
a.
deflation, which changed the terms of long-term contracts and discouraged long-term
exchange
b.
inflation, which reduced the value of the dollar and eroded the savings of the elderly
c.
stable monetary policy, which caused business decision makers to lose confidence in the
Fed’s ability to fine-tune the economy
d.
establishment of the Federal Deposit Insurance Corporation
13. When the money supply declined by approximately 30 percent during the 1929 through 1933 period,
a.
real output increased.
b.
the general level of prices increased.
c.
the velocity of money increased by a proportional amount.
d.
unemployment increased.
14. Economic analysis indicates that the monetary policy of the 1930s, which shifted back and forth
between restrictive monetary policy and expansionary monetary policy, would likely result in
a.
economic stability and growth in real levels of output.
b.
keeping the general level of prices relatively stable because the periods of restrictive policy
would just offset the periods of expansion.
c.
an environment of uncertainty, which would lead to economic instability.
d.
economic stability, because changes in monetary policy can be counted on to exert a
predictable impact on the economy quickly.
15. The Smoot-Hawley trade bill of 1930, designed to save jobs and increase revenue for the federal
government, resulted in
a.
an increase in both employment and federal tax revenue.
b.
a sharp reduction in trade and a decline in federal tax revenue.
c.
the protection of jobs while maintaining the level of trade, but it did not increase federal
tax revenue.
d.
a decline in the volume of trade, but an increase in revenue from tariffs, which made it
possible for the federal government to balance its budget.
16. If higher tariffs, such as those enacted by the Smoot-Hawley trade bill, reduce the imports of the
United States, which of the following will be most likely to occur?
a.
U.S. employment will increase.
b.
The unemployment rate of the United States will decline.
c.
U.S. exports will increase because foreigners will want to buy more from U.S. producers.
d.
U.S. exports will decline because foreigners will be earning fewer of the dollars needed to
purchase goods and services from Americans.
17. Which of the following contributed to the severity of the Great Depression in the 1930s?
a.
constant structural changes that created uncertainty and undermined markets
b.
the Fed’s policy of rapid monetary expansion during the early 1930s
c.
a reduction in tariffs protecting many U.S. industries
d.
a substantial tax rate reduction, which led to large deficits and high interest rates during the
early 1930s
18. Fiscal policy analysis indicates that large tax increases during a severe recession will result in
a.
an increase in the incentive to earn and the maintenance of a balanced federal budget.
b.
higher tax revenues and an expansion in government spending.
c.
smaller budget deficits, which will speed an economic recovery.
d.
a reduction in aggregate demand and a worsening of the recession.
19. High marginal tax rates, such as those instituted during the Great Depression, will
a.
increase the incentive of people to earn.
b.
lead to a proportional increase in tax revenue and a reduction in the size of the budget
deficit.
c.
cause people to work, earn, and invest less than would be the case if marginal tax rates
were lower.
d.
attract workers from other countries where tax rates are lower.
20. The Agriculture Adjustment Act of the Roosevelt Administration attempted to boost prices of
agriculture products by
a.
increasing the money supply from year to year at a constant rate.
b.
decreasing the money supply through a policy of monetary contraction.
c.
increasing demand through lower taxes and budget deficits.
d.
reducing supply through the planned destruction of agricultural crops and livestock.
21. The Agricultural Adjustment Act, passed in 1933, was an effort to
a.
keep agricultural prices high by increasing supply.
b.
keep agricultural prices low by increasing supply.
c.
keep agricultural prices high by decreasing supply.
d.
keep agricultural prices low by decreasing supply.
22. The National Industrial Recovery Act, passed in 1933, was an attempt to
a.
break monopolies and cartels, and introduce competition into several different industries.
b.
fix prices, wages, and quotas for several industries in an effort to keep prices high.
c.
lower corporate taxes and remove collusive behavior in an effort to keep U.S. firms
competitive with foreign manufacturers.
d.
create a stable economic environment that would encourage investment and expansion in
the industrial sector of the economy.
23. The National Industrial Recovery Act essentially legalized
a.
labor unions.
b.
business cartels.
c.
minimum wage laws.
d.
import tariffs.
24. Which of the following was most responsible for bringing the Great Depression to an end?
a.
the increase in industrial demand due to the military build-up prior to World War II
b.
the expansionary monetary policy of the Fed during the 1930s
c.
the New Deal policies that expanded government spending, stimulated demand, and
increased output
d.
the increase in import tariffs that saved jobs and expanded total employment
25. Which of the following contributed to the severity of the Great Depression?
a.
the substantial budget surpluses run during the Hoover administration
b.
a sharp increase in tariff rates in 1930
c.
the large reduction in tax rates under the Hoover administration
d.
a highly expansionary monetary policy followed by the Fed in the late 1920s and early
1930s
26. Analysis of the Great Depression indicates that
a.
even though monetary and fiscal policies were highly expansionary, they were unable to
offset the economic downturn.
b.
even though monetary policy was expansionary, restrictive fiscal policy dominated during
the 1930s.
c.
a reduction in tax rates could not prevent the economic downturn from spiraling into a
depression.
d.
the depth of the economic plunge, if not its onset, was the result of monetary, fiscal, and
regulatory policies.
27. Did the fiscal policy of the 1930s bring an end to the Great Depression?
a.
No, government spending and budget deficits as a share of GDP were relatively small
during the 1930s, and there is little evidence that fiscal policy did much to stimulate
output.
b.
No, even though budget deficits steadily rose from 2 percent of GDP in the early 1930s to
more than 10 percent of GDP in 1939, this expansionary fiscal policy had little effect on
output.
c.
Yes, even though the spending programs of the New Deal led to budget deficits, they also
led to a steady reduction in the rate of unemployment during the latter half of the 1930s.
d.
Yes, the fiscal policy that kept the federal budget balanced throughout the 1930s created a
stable business climate and eventually stimulated investment.
28. Which of the following perspectives exerted the most impact on fiscal policy during the Great
Depression?
a.
the Keynesian view
b.
the supply-side view
c.
the view that the federal government should maintain a balanced budget
d.
the new classical view that fiscal policy exerts little impact on demand and output
29. If fiscal policy were able to exert a significant impact on the economy during the Great Depression, we
would expect
a.
an increase in government expenditures and a reduction in budget deficits.
b.
an increase in government expenditures and an increase in budget deficits.
c.
a decrease in government expenditures and a reduction in budget deficits.
d.
a decrease in government expenditures and an increase in budget deficits.
30. Which of the following best describes the impact of fiscal policy during the Great Depression?
a.
Despite the large increases in government spending as a share of GDP when the New Deal
policies were initiated, the expansionary fiscal policy failed to stimulate demand.
b.
Fiscal policy was focused on monetary expansion, when it should have focused on
maintaining a balanced budget.
c.
It is difficult to link expansionary fiscal policy with economic recovery because
government spending and budget deficits were a relatively small portion of GDP prior to
the beginning of World War II.
d.
There is a direct correlation between increases in government spending as a share of GDP
and increases in output and employment.
31. Which of the following is a lesson that can be learned from monetary policy during the Great
Depression?
a.
Monetary policy should be changed frequently in response to economic fluctuations.
b.
Prolonged periods of monetary contraction will retard economic growth.
c.
Low interest rates will direct an economy toward recovery.
d.
Monetary policy should focus on variables such as output and employment.
32. Why do nations impose trade barriers, such as those instituted during the Great Depression, that make
it difficult for their own citizens to trade with people in other countries?
a.
Trade restrictions are a good way for a country to increase the total employment and
income level of its citizens.
b.
As the experience during the 1930s illustrates, trade restrictions are an effective way to
increase exports and tax revenues.
c.
Trade restrictions provide gains to domestic residents at the expense of foreigners.
d.
Trade restrictions often provide benefits to highly visible special interest groups while
imposing a less visible cost on the general populace.
33. Which of the following was true with regard to the Great Depression?
a.
The policies of the New Deal brought the Great Depression to an end well before World
War II.
b.
Sound economic policy was followed during this era, which makes the length and severity
of the Great Depression puzzling to economists.
c.
The length and severity of the Great Depression was the result of unsound economic
policies followed by both the Hoover and Roosevelt Administrations.
d.
The Great Depression was largely the result of the highly expansionary monetary policy of
the Fed during the 1930s.
34. During a recession, the political incentive structure will encourage politicians to
a.
undertake sound economic policies that are consistent with stability and growth.
b.
adopt any policies, even bad ones, that give the appearance of taking action.
c.
undertake policies that promote long-term economic growth rather than short-term
benefits.
d.
do nothing and let the recession run its course.
35. During the Great Depression fiscal and monetary policy was characterized by
a.
an increase in tax rates and a contraction in the money supply.
b.
a decrease in tax rates and a contraction in the money supply.
c.
a decrease in tax rates and an expansion in the money supply.
d.
an increase in tax rates and an expansion in the money supply.
36. Which of the following is true?
a.
The Great Depression re-enforces the view that raising taxes in the midst of a severe
recession is a bad idea.
b.
The Great Depression clearly indicates that a prolonged period of monetary contraction
will keep inflation low and promote monetary stability.
c.
The Great Depression illustrates that trade restrictions will protect domestic industry and
save jobs.
d.
The Great Depression demonstrates that the political incentive structure during a severe
downturn will encourage politicians to avoid frequent policy changes.
37. Sound economic policy is policy that is consistent with
a.
good intentions.
b.
quick action and frequent policy changes until positive results are achieved.
c.
monetary stability, free trade, and low tax rates.
d.
saving jobs, protecting domestic industry, and increasing tax revenue.
38. Which of the following statements about the Great Depression is correct?
a.
The 1929 stock market crash explains the lengthy duration of the Great Depression.
b.
The severity of the economic downturn, if not its onset, was the result of perverse
monetary, fiscal, and regulatory policies.
c.
The sharp decreases in tariff rates and tax rates cushioned the downturn and limited it to
three years.
d.
The Great Depression indicates that monetary policy affects prices but exerts little impact
on output.
39. An analysis of stock market prices during 1929 to 1930 indicates that
a.
the stock market crash of October 1929 was the cause of the Great Depression of the
1930s.
b.
stock market prices rose steadily throughout the entire year of 1930.
c.
after recovering most of its value from the crash of October 1929, stock prices again
declined steadily during the debate and passage of the Smoot-Hawley trade bill.
d.
after the crash of October 1929, the Smoot-Hawley trade bill marked the beginning of a
steady recovery of the stock market.
40. Monetary policy from 1929 to 1933, and again in 1937 to 1938, was characterized by
a.
monetary expansion, which led to deflation.
b.
monetary contraction, which led to deflation.
c.
monetary expansion, which led to inflation.
d.
monetary contraction, which led to inflation.
41. How do high tariffs and other restraints on international trade affect a nation’s prosperity?
a.
They increase employment and thereby promote the growth of GDP.
b.
They prevent a nation from fully realizing the potential gains from specialization,
exchange, and competition.
c.
They protect domestic producers and thereby promote economic growth.
d.
Both a and c are correct.
42. As a result of the Smoot-Hawley trade bill of 1930,
a.
both the volume of U.S. trade and the tariff revenues derived from trade increased
substantially.
b.
the volume of U.S. trade decreased, but the tariff revenues derived from trade increased.
c.
the volume of U.S. trade increased, but the tariff revenues derived from trade decreased.
d.
both the volume of U.S. trade and the tariff revenues derived from trade decreased
substantially.
43. Which of the following contributed to the severity of the Great Depression in the 1930s?
a.
large increases in tax rates in 1932 and again in 1936
b.
large increases in the money supply during the early 1930s
c.
a reduction in tariffs protecting many U.S. industries
d.
a substantial tax rate reduction, which led to large deficits and high interest rates during the
early 1930s
44. During the Great Depression, fiscal policy focused primarily on
a.
keeping taxes low.
b.
raising taxes during an economic expansion and lowering taxes during a recession.
c.
trying to balance the federal budget.
d.
running budget deficits in order to stimulate real output and GDP.
45. The National Industrial Recovery Act, passed in 1933, was a New Deal effort to
a.
remove trade barriers so that U.S. corporations could be more competitive.
b.
fix prices, wages, and quotas in an effort to keep prices high.
c.
lower corporate taxes in order to stimulate real output.
d.
stimulate demand for agricultural products through tax incentives.
46. Which of the following factors contributed to a breakdown of the economy during the Great
Depression?
a.
a sharp increase in tax rates in 1932
b.
a sharp decline in the money supply during 1929 through 1933
c.
a sharp increase in tariff rates during 1930
d.
all of the above
47. The New Deal policies of the Great Depression resulted in
a.
a reduction in unemployment and an increase in real output.
b.
a stable economic environment and an increase in investment.
c.
economic uncertainty and prolonged unemployment.
d.
a quick end to the depression once the policies had taken effect.
48. Which of the following was true of fiscal policy during the Great Depression?
a.
The federal government generally ran a budget surplus and this reduced aggregate demand.
b.
The federal government persistently balanced its budget during the 1930s.
c.
Government spending was reduced as a share of GDP and budget deficits were small.
d.
Government spending increased as a share of GDP but budget deficits were relatively
small (generally less than 4 percent of GDP).
49. The Great Depression illustrates that monetary policy is
a.
effective against inflation but incapable of dealing with a decline in output.
b.
a source of economic instability if utilized inappropriately.
c.
incapable of reversing an economic downturn when the money supply is increasing at a
constant rate.
d.
incapable of reversing a major downturn unless the recession stems from inflation.
50. The Great Depression demonstrates that the appropriate fiscal and monetary policy to combat a
recession would be
a.
an increase in taxes and a contraction in the money supply.
b.
a decrease in taxes and a contraction in the money supply.
c.
a decrease in taxes and an expansion in the money supply.
d.
an increase in taxes and an expansion in the money supply.
51. According to the data, was the stock-market crash of 1929 the primary cause of the Great Depression?
a.
No, the Great Depression actually began two years before the stock market crash of 1929.
b.
Yes, after the stock market crash of October 1929 the market never recovered until the
depression came to an end a decade later.
c.
Yes, sharp reductions in stock prices like that of 1929 always result in prolonged
depressions.
d.
No, the stock market actually recovered to the level of October 1929 during the five
months following the crash.
52. Prolonged periods of monetary contraction, as was the case during the Great Depression, will likely
result in
a.
an increase in real output and employment.
b.
an increase in loanable funds and upward pressure on the rate of inflation.
c.
a decrease in output and downward pressure on prices.
d.
a decrease in unemployment and upward pressure on prices.
53. As unemployment rose during 1930 through 1932 and the economy plunged into the Great Depression,
policy makers
a.
reduced tax rates and increased the money supply.
b.
increased tax rates and reduced the money supply.
c.
increased both tax rates and the money supply.
d.
reduced both the tax rates and the money supply.
54. When overall production is taken into account, trade restrictions, such as those enacted by the
Smoot-Hawley trade bill,
a.
save good paying jobs.
b.
neither create nor destroy jobs; they reallocate them.
c.
increase employment in the domestic industries that are most productive.
d.
reduce imports, without affecting the volume of exports.
55. What prompted the large increase in tax rates in 1932 in the midst of an economic recession?
a.
concern that inflation would rise due to increases in real output and aggregate demand
b.
expansionary fiscal policy designed to stimulate aggregate demand
c.
the Keynesian view that taxes should be increased during a recession
d.
the view that the federal government should maintain a balanced budget
56. What impact did the National Industrial Recovery Act (NIRA) of 1933 have on industrial output?
a.
Industrial output had been declining, but it stabilized during the months following passage
of the NIRA.
b.
Industrial output increased sharply after the passage of the NIRA.
c.
Industrial output had begun to increase, but it fell sharply following the passage of the
NIRA.
d.
Industrial output and employment declined during the months prior to passage of the
NIRA, and the legislation was unable to stop the decline.
57. Which of the following did not contribute to the severity of the Great Depression?
a.
a sharp reduction in the money supply during the early 1930s
b.
a large tax increase (to balance the budget) in the early 1930s
c.
substantial increases in the tariff rates on imported goods
d.
a reduction in government expenditures and a substantial cut in personal income tax rates
during 1932 and again in 1936
58. Which of the following conditions during 2008-2009 most closely paralleled the economic conditions
of the Great Depression?
a.
record-high unemployment rates for a period of many years
b.
a sharp and prolonged contraction in the money supply
c.
significant increases in taxes and trade restrictions in order to counter budget deficits
d.
frequent policy changes that generated an unstable and unpredictable economic climate
59. Analysis of the Great Depression indicates that
a.
even though monetary and fiscal policies were highly expansionary, they were unable to
offset the economic plunge.
b.
even though monetary policy was expansionary, restrictive fiscal policy dominated during
the 1930s.
c.
a reduction in tax rates could not prevent the economic downturn from spiraling into a
depression.
d.
the severity of the economic decline, if not its onset, was the result of perverse monetary,
fiscal and regulatory policies.
60. Which of the following is an important lesson that can be drawn from the experience of the Great
Depression?
a.
Frequent shifts in monetary policy can help smooth out unstable economic conditions
during a recession.
b.
Trade restrictions can “save jobs” and expand total employment during an economic
downturn.
c.
The good intentions of political decision-makers are no substitute for sound policy.
d.
The federal government should always balance its budget during a recession.