Question

During the Great Depression, real GDP decreased, unemployment rose, and the inflation rate was negative. Which would have been the appropriate federal government policy combination to improve economic performance?

a.) increase government spending, decrease taxes, decrease the quantity of money

b.) increase government spending, decrease taxes, increase the quantity of money

c.) decrease government spending, increase taxes, decrease the quantity of money

d.) keep government spending and taxes stable, increase the quantity of money

Answer 1

b.) increase government spending, decrease taxes, increase the quantity of money

(All of these would increase the aggregate demand in the economy which would bring the economy out of the recession.)

Answer 2

The appropriate federal government policy combination to improve economic performance during the Great Depression would be:

a.) increase government spending, decrease taxes, decrease the quantity of money

This policy combination aligns with the principles of Keynesian economics, which advocates for expansionary fiscal policy during economic downturns. Here's how each component of the policy would help improve economic conditions:

1. Increase government spending: By increasing government spending on public projects, infrastructure, and social programs, the government can create jobs and stimulate demand in the economy. This can help offset the decrease in private spending and investment during the recession.

2. Decrease taxes: Reducing taxes for individuals and businesses can increase disposable income and incentivize spending and investment. Lower taxes can lead to increased consumer spending and business expansion, contributing to economic growth.

3. Decrease the quantity of money: Controlling the money supply and implementing measures to decrease the quantity of money in circulation can help combat deflation and stabilize prices. During the Great Depression, negative inflation rates were indicative of deflation, which can be harmful to economic growth as it discourages spending and investment.

It's important to note that economic policies are complex, and there is often debate among economists and policymakers about the most effective approach during economic downturns. However, during severe economic contractions like the Great Depression, expansionary fiscal policy (increasing government spending and reducing taxes) along with measures to control the money supply can be instrumental in boosting economic activity and promoting recovery.