CHAPTER18BIGEVENTS:THEECONOMICSOFDEPRESSION,HYPERINFLATION,ANDDEFICITSSolutionstotheProblemsintheTextbook:ConceptualProblems:1.a.TheKeynesianexplanationfortheGreatDepressionconcentratesonthefallofinvestmentspendingandreductioninaggregateconsumption.Thedecreaseinaggregatedemandwasreinforcedbyrestrictivefiscalpolicyasthegovernmenttriedtobalancethebudget.1.b.Themonetarists'explanationfortheGreatDepressionconcentratesonthedeclineinmoneysupply.TheFedfailedtopreventthelargenumberofbankfailuresandconsumerslostconfidenceinthebankingsystem.Thisledtoanenormousincreaseinthecurrency-depositratio,causingadecreaseinthemoneymultiplier.Theresultingseveredeclineinthesupplyofmoneythenleadtotheeconomicdownturn.1.c.Bothexplanationsgivenabovefitthefactsandthereisnoinherentconflictbetweenthem;infact,theycomplementoneanotherquitenicely.Thecombinationofineptfiscalandmonetarypolicymayhaveturnedwhatcouldhavebeenanaveragerecessionintoamajordepression.1.d.TheGreatDepressionisoneofthemostdrasticeconomiceventsinrecenthistoryandanytheorythatcanadequatelyexplainitscauses(orfindremediestopreventsimilaroccurrencesinthefuture)willattractattention.SomeeconomistsarguethattheGreatDepressionprovesthattheeconomyisinherentlyunstableandrequiresalongtimetoadjustbacktoafull-employmentequilibrium.Othersarguethatitprovesthatgovernmentpolicyisoftenmisguidedandthatitmaybebettertorelyonmarketforcestobringusbacktoanequilibrium.2.Inthelongrunnomajorinflationcanpersistwithoutrapidmoneygrowth,sincetheinflationrateisequaltothegrowthrateofmoneysupplyadjustedforthetrendinrealoutputandchangesinvelocity.Intheshortrun,however,changesinoutputgrowthandvelocityarequiteunpredictableandaffecttheinflationrate.Suchshort-runfluctuationscanbecausedbysupplyshocksorpolicychanges.3.a.Thekeyquestionforgovernmentsdesiringtoreduceinflationishowcheaply(intermsoflostoutput)theywanttoachieveadesiredinflationrate.Agradualstrategyattemptsaslowandsteadyreturntoalowinflationratebyreducingmonetarygrowthslowlyinanattempttoavoidasignificantincre...
