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Econ 2200 Exam 3
UGA Moore
Undergraduate 3

Additional Economics Flashcards




Describe the economic crises (in 1893 and again in 1907) that led to the passage of the AldrichVreeland Act in 1908.
-Bank Panic of 1893:Lack of confidence in bank system led to bank runs and panics, banks would call in their call loans and suspend payment of specie
-Bank Panic and Depression of 1907: widespread suspension of payments that lasted 2 months and led to cash shortages (decease in money supply) which became severe recession
-because banke had no lender of last resort to deal with cash shortages, the Aldrich Vreeland Act was passed to resolve this problem
Describe the original structure of the Federal Reserve System (Fed) that was created in 1913. What were the requirements for commercial banks that wished to join the Fed?
Composed of 12 Federal Reserve Banks(12 districts)
Each Run by board of 9 Directors
3 appointed by Fed to represent public and 6 elected by member bank (3 could be bankers, and 3 to represent business, industry & agriculture)
Federal Reserve Board Composed of 7 Members (Including Secretary of the Treasury, comptroller of currency ex officio & 5 appointees)
Membership was compulsory for NB, optional for SB
Membership required:
Purchase Fed Stock
Deposit cash reserves w/ district bank
What were the two main features of the Aldrich-Vreeland Act?
National Currency Associations: An attempt to create a potential lender of last resort for banking system, BUT were not required to
National Monetary Commission: appointed to study the US banking system & to make recommendations
Create a Central bank to hold commercial bank reserves & act as lender of last resort (led to creation of The Fed)
Central Bank Should also serve as fiscal agent for Federal Gov't "bank"(before treasury dept had this role)
What are the typical functions of a central bank? List and explain each function.
Central Bank: Gov't created bank that holds a monopoly on the issuing of bank notes.
Other Functions may include:
Lender of Last Resort
Banker's bank
Fiscal Agent for federal gov't(fed gov can borrow & write checks)
Exercise macroecon(monetary) policy inc/dec money supply
How well did the early Fed perform the central bank functions described in #7?
In the 1920's 30's the Fed was good as clearinghouse, but did a poor job at regulating currency and easing business cycles through macroeconomic policy
Other than metal coins, what types of money circulated in the US in the late 1800s?
SB notes
NB notes
Demand Deposits
When Bimetallic standard exists(overvalued at the mint will circulate as money)
If the US officially had a bimetallic standard until 1900, why did it operate on a de facto gold standard for most of the late 1800s?
In the Late 1800's silver was worth 3% more on the bullion market than at the mint, and so was undervalued at the mint, therefore only gold circulated as money and such there was a defacto gold standard
Use the Quantity Theory of Money (QTM) and Figures 19.1-19.2 to discuss the relationship between the money supply (M) and the price level (P) in the late 19th century.
There was an increase of Greenbacks in the early 1860's and thus a large increase in price level (increases in M leads to increases in P and Y)
During the Civil War, the US was forced to suspend payment of specie. Why? Use data from Table 19.2 to support your answer
Due to wartime inflation US prices > International prices and thus exports decreased, imports increased. and gold flowed out of the US(had to pay for trade deficit)
Payment of specie was suspended because monetary base was currently tied to Greenbacks(Fiat money)
What had to happen in order for specie payment to resume following the Civil War? Using the QTM, describe and explain the differing views of Republicans and Democrats on this issue
In order to resume specie payment, US prices would have to decrease
Both parties agreed that a decrease in P was a desirable Goal, BUT they disagreed on how to achieve it
Democrats Severe Contraction
Reduce M quickly to Reduce P(burning greenbacks as they were received)
Republicans: Stable Money Supply
Hold M stable and as economy recovers, prices should gradually fall as Y increases
. Describe the actual events that eventually led to resumption of specie payment in 1879. Use data from Table 19.2 to support your answer
1865 Contraction Act: decrease in M led to decrease in P

1868 Congress abolished contraction act b/c price level took sharp decline and farmers complained.
Table 19.2: In the US 1865 prices were 176 and by 1973 they were 129(by the time of resumption they were 104)
Why did proponents of the free silver movement call the Coinage Act of 1873 “a crime?” Describe the market and mint values of silver in 1873.
The Coinage Act of 1873 had no provision for minting silver coins: made sense at the time b/c silver was undervalued at the mint and wasn't circulating as money (16:1)
What happened to the silver market after 1874? Describe the market and mint values of silver after 1874.
After 1874: due to increase in the Supply of silver in the US(from US silver mines) and European countries shifting from a bimetallic to a gold standard, the market price of silver dropped and was no longer undervalued at the mint-- ration was 30: 1
when people took silver to the mint for coinage, the govt would only take as much as needed for small subsidiary coins
What groups tended to support the sound money position? Explain their position.
Republicans, the Northeast (financial Centers) Urban Banking, finance sector, manufacturing interests
wanted a stable money supply and to maintain defacto gold standard
What groups tended to support the free silver movement? What did they want the government to do and why?
Democrats, Rural Farmers & silver producers (midwest and south)
Wanted Gov't to reintroduce silver into the money supply which would create inflation(they thought would benefit farmers) Not true due to terms of trade
Describe the legislative response of Congress to the silver controversy (first in 1878,
1878: Bland Alison Act: Compromise between sound money and free silver
-limmited coinage of silver
-$2-$4 million of silver per month at market prices
-limping monetary standard
(not bimetal not gold either)
increased price for a little while but not miners nor farmers were happy
and again in 1890). To what extent were free silver proponents satisfied by this legislation?
Sherman Silver Purchase Act 1890
-4.5 million ounces of silver per month
(thought decreasing supply would increase price)
-Sellers got special notes that were legal tender, could be exchanged for gold or silver at treasury's discretion
Almost always redeemed for gold to keep defacto gold system
Preserved Gold Standard but silver price continued to fall and gold reserves in treasury fell too
---concerned US would have to suspend payment of specie again-leave gold std
What happened to the US money supply following the Sherman Silver Purchase Act?
The Money Supply increased but treasury purchases were insufficient to prevent silver purchases and deflation occurred
Why was the Sherman Silver Purchase Act repealed? (Describe the concerns of “sound money” advocates, including President Cleveland.)
Cleveland Afraid they would need to suspend payment of specie again
People became insecure about holding paper money-> result bank runs and panics
While the aggregate price level fell for most of the late 1800s, after 1896 the price level began to increase. What caused this change in the movement of prices? (Use the QTM to support your answer.) How did these events impact (1) the US economy and (2) the free silver movement?
After 1896 Gold flowed into the US due to trade surplus and gold discoveries in Alaska, Cali, SA
Increase in M leads to moderate increase in P
US Econ very well 1896-1920 (farmers VERY well "golden age of agriculture)
due to increase demand of US Agri goods
21. The US officially adopted the gold standard in 1900. At the time, was this a particularly controversial event? Why or why not?
Not controversial
relatively good econ conditions (free silver people no longer cared)
List and define the categories of spending that comprise aggregate demand (at a given price level).
C(consumption of Housholdes)
I(investment spending and home purchase)
G(gov't spending)
Ex-Im_(net exports)
Review the definitions of fiscal policy and monetary policy (as defined earlier this semester).
Fiscal- Change in Govt Spending
Monetary- Change in Fed Policy (int rate)
List and describe the 3 “traditional” monetary policy tools used by the Federal Reserve (Fed). For each policy tool, you should be able to explain the relationship between the policy tool, the monetary base, bank reserves, loans, interest rates, the money supply and aggregate demand. Use the policy tools to discuss the difference between expansionary and contractionary monetary policy
1.DR (Discount Rate) Fed Charges banks for overnight loans.
dec= Inc M -----inc= Dec M
2.RR (reserve requirements)Same
3.Open Market Ops-- Purchase & sales of Treasury Bonds
If Buys- increase in M, banks have cash not connected to liabilities
If sells- dec M
Why is it very uncommon for the Fed to use the reserve requirement to conduct monetary policy?
If fed changes often, depositors will lack confidence in the bank system.
RR is primarily a regulatory feature
What is the “fed funds rate”? How does the Federal Reserve use the fed funds rate in conducting onetary policy?
Fed Funds Rate: Interest rate for loans between commercial banks for short term, overnight loans
(not the same as DR)
Fed Funds Rate Not set by fed but fed targets specific rate by selling and buying bonds
its called the fed fund rate because most reserves of banks are held at the federal reserve district bank- so their funds at the Fed are being Lent
What was the preferred policy tool of the Fed in the 1920s? Which policy tool has the Fed typically used during your lifetime?
1920's- DR- didnt know about effecting through open market ops yet
Our lifetime- open market ops to affect money supply
World War I ended in 1919. Briefly describe the American economy immediately following the War's end. Focus on the expenditure components of aggregate demand.
US was doing well Because: Continued deficet spending to finance war effort.
(gov't spending > taxes)
High Euro Demand for US goods(continued a short time after WWI
Expansion of M by the Fed (increas in C and I and in AD)
Increase in C
All Increase
Discuss how market forces, monetary policy and fiscal policy led to changes in US aggregate demand after 1920, and describe the recession of 1921-22. Was Fed policy procyclical or countercyclical during this period? Explain
After 1920:
Decrease in D for US Exp
Fed Gov stopped deficet spending
Fed Sharply reduced M by incr DR
Lead to Recession 1921-22
Fed was Pro-Cyclical-Worked With Decreases rather than against(fed the fire)
Discuss some of the changes in American demographics and lifestyle that characterized the “Roaring 20s.” Be sure to discuss urban migration, the growth of suburbs and increased household ownership of consumer durables.
Growing Dependable Electric Supply
increased purchase and consumption of durables

urban migration-esp Afro Am. Detroit, Chicago, NYC
Increase in D for manufact Labor
Widespread ownership of automobiles
Increase Consumer Credit and installment Plans
Inc Adv and Print encourage C spend
Manu Big Bus Cont Growth
Good times for Non farm labor
low unemployment, increase Hum Capital Real capita earnings
Briefly describe how innovations by Ford changed the mass production process for cars (and ultimately other manufactured goods). How did Ford’s innovation affect automobile output? productivity?
per-unit cost?
For was NOT first to use assembly line- just first to use mech assembly line
allowed for further productivity, econ of scale
Describe the price changes that ultimately made cars, particularly the Ford Model T, affordable for the average American household. How did increased automobile ownership affect American lifestyles?
1908 model t cost $850 (18-20k today)
mid 1920's price less than $300(3-5k)
26% of american families had car(1930)
Discuss the impact of credit and advertising on the consumer durables market. Describe changes in the market (supply & demand) for consumer durables in the 1920s.
Adds provided info on methods of payment, goods and prices
Consumers inc Demand for this Info and these products
Despite inc in D, real price was falling due to inc in effic
inc in supply greater than inc demand
Discuss the rise and fall of the construction sector during the 1920s. Explain the terms of the typical home mortgage during the 1920s. Describe trends in housing prices, foreclosure rates and mortgage debt.
1920-1925 Huge Construction Boom,
247,000 houses 1920
937,000 1925
Typical Mort- 5 yr with balloon payment
most cant make balloon payment
Debt Inc throughout 1920's
Acquired equity very slowly
as long as property values inc all is well(some spec buying)
By 1925 S > D
Banks less willing, Compared to today, problem was less than today; no govt intervention
Why did increases in outstanding mortgage debt become particularly problematic after 1925?

Supply Increased more than Demand and so property values decreased prompting many homeowners to default---

Why pay a loan back for more than your house is worth?

Describe how existing institutions encouraged "big business growth"
Little Gov reg in business in 1920's
Calvin Coolidge was against regulation
put in power Bland Ppl In FTC. Mergers cont.
Very Pro Business
Courts tend to be anti union and pro bus-allowed injunction to stop strikes, pickets and boycotts. upheld "yellow dog" contracts
Describe increases in manufacturing output during the 1920s. How did technological and capital investments encourage this growth?
Manufacturing output increased by 2/3
High investments in Tech(like electricity)
Older Plants also repaired/ rebuilt with more and better capital
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