History Monetary and Fiscal Policy

The Banker's Panic of 1907 was caused by which of the following?

A failed attempt by Wall Street stock traders to corner the market in the stock of the United Copper Company.

During WW I what did the government do with respect to the income tax to help finance the war effort?

A temporary income tax

Who was Alan Greenspan?

Alan Greenspanis an American economist who served as Chairman of the Federal Reserveof the United States from 1987 to 2006. First appointed Federal Reserve chairman by PresidentRonald Reaganin August 1987, he was reappointed at successive four-year intervals until retiring on January 31, 20

Under the Bretton Woods agreement which of the following statements was true?

All currencies of countries belonging to the Bretton Woods agreement were pegged to the U.S. dollar at fixed exchange rates outlined in the Bretton Woods agreement.

Which type of economist would argue that easy credit policies of the Federal Reserve in the 1920's led to an unsustainable credit boom in asset prices that inevitably led to a market bubble and the eventual bursting of that bubble, resulting in the Great Depression?

Austrian economists.

86. Over the last 46 years, under which presidential administration did the federal government ever experience an annual budget surplus?

Bill Clinton

What is the BLS?

Bureau of Labor Statistics the U.S. Department of Labor is the principal federal agency responsible for measuring labor market activity, working conditions, and price changes in the economy. Its mission is to collect, analyze, and disseminate essential economic information to support public and private decision making.

What happened after inflation destroyed the value of the continental dollar?

Many people switched to using silver Spanish milled dollar coins that had an intrinsic value.

Who said ""inflation is always and everywhere a monetary phenomenon? What does that mean?

Milton Friedman, on." In other words, he believed prices could not increase without an increase in the money supply. To get the economically devastating effects of inflation under control in the 1970s, the Federal Reserve should have followed a constrictive monetary policy. This finally happened in 1979 when Federal Reserve Chairman Paul Volcker put themonetaristtheory into practice.

Which type of economist would argue that the Great Depression started as an ordinary recession but that Federal Reserve mistakes resulting in a shrinking money supply and made the recession turn into a Great Depression?

Monetarist economists.

What does it mean when we say the Fed "provides liquidity" to the banking system and financial markets?

When the Federal Reserve uses the term "provision of liquidity" it is referring to the injection of new money in the form of Legal Reserves into the financial system

What were the two general goals of the DID-MCA (1980)?

a) Begin deregulation for banks, thrifts, and credit unions b) Increase Fed's power to conduct monetary policy

The Coinage Act of 1857 repealed prior legal tender laws concerning foreign specie and ended the use of foreign coins as legal tender (only U.S. coins were allowed).

true

Which of the following is true (more than one may be true)?

- Rural states in the Midwest and South supported the Thomas Jefferson view - Northeastern seaboard states with large cities supported the Alexander Hamilton view - Farmers generally supported the Thomas Jefferson view - Bankers and Industrialist supported the Alexander Hamilton view

Thomas Jefferson argued in favor of which of the following (more than one may be true)?

- a weak central (Federal) government - strong state governments (States rights of self determination) - state government control of banking, the granting of bank charters - a strict interpretation of the Constitution - no Central Bank and no national bank charters (licenses to do business)

Now the Coinage Act of 1792 was a response, in part, to the inflation of the Continental dollar. This act first set the gold price at _____.

$19.39 per ounce

What was the official gold price after the Specie Payment Resumption Act of 1875? What was the relationship between the free market price of gold and the official price of gold after it was fully implemented?

$20.67

In 1834 Congress changed official price of gold to ___?

$20.67 per ounce

What was the official gold price in US dollars from 1834-1933?

$20.67 per ounce

Under the Bretton Woods Agreement what was the official gold price?

$35 per ounce

The Coinage Act of 1792 did which of the following (more than one may be true)?

- Created the United States dollar as the country's standard unit of money - Set the official gold price at $19.39 per ounce - Established the U.S. Mint - Pegged the value of the newly created U.S. dollar to the Spanish silver dollar. - Allowed individual citizens to take gold and silver to the mint and have those metals melted down and struck into coins - The value of a dollar was defined in terms of both a certain amount of gold and a certain amount of silver. - Established a bimetallic system of money

Alexander Hamilton argued in favor of which of the following (more than one may be true)?

- federal government control of banking and the granting of bank charters - weak State governments - a Central Bank and nationwide system of nationally chartered banks - a loose interpretation of the Constitution - strong Federal government

67. What was the relationship between a monetary policy that expanded the money supply to try to keep interest rates low, a fiscal policy that increased government spending for social welfare programs, infrastructure spending, and defense, tax cuts, and inflation in the 1960's?

1. Increased fiscal policy spending and tax cuts resulted in rising deficits. 2. Rising deficits resulted in more government borrowing 3. More government borrowing resulted in the need for the Fed to keep interest rates low 4. The Fed attempted to keep rates low by increasing the money supply and monetizing the new debt 5. Increasing money supply resulted in rising inflation 6. Rising inflation led to rising nominal interest rates (Fisher equation) 7. Go back to step 4 8. Continue cycling through steps 4 to 7 until you create a rising inflation environment

What was Regulation Q? How did it contribute to disintermediation?

1. Regulation Q placed ceilings on the interest rates banks could pay on deposits. 2. No interest could be paid on checking account deposit balances. 3. As inflation rose the inflation adjusted market rates of interest rose (Fisher Equation). 4. Treasury Bill yields rose due to higher inflation premiums. 5. Regulation Q interest rate ceilings became binding. 6. Bank depositors withdraw money from banks and invested directly in the T-Bills and other securities that paid market interest rates. 7. This outflow of money from Commercial Banks and Savings and Loan Associations(referred to as "financial intermediaries") was called "disintermediation"

83. In a few short sentences, describe George Bush's fiscal policy from 2000 to 2007. In general terms, be sure to mention what happened to marginal income tax rates, tax revenues, defense expenditures, and annual budget deficits during this period. Ignore the additional expenditures that are associated with the financial crisis in 2008.

1.lowered top marginal income tax rate from 39.5% to 35% 2.Cut capital gains and dividend tax rates, accelerated depreciation write-offs 3.Increased exemption limits for the Alternative Minimum Tax Bush's tax cuts decreased tax revenues. Recession also slows tax revenues and increases government spending for unemployment benefits and other social services associated with a recession. Military spending rises for wars resulting in increasing deficits and increases in the national Debt.

When was the Federal Reserve Act passed?

1913

39. In the late 1920's both the economy and the stock market were "overheated" and the stock market had evolved into a "bubble". What did the Federal Reserve do in 1929 with respect to interest rates?

1929, the Federal Reserve raised interest rates several times in an attempt to cool the overheated economy and stock market

Why did the stock market crash cause banks to fail? Explain.

3.Bank failures spiked (no deposit insurance so depositor losses) 4.People lost faith in banks, withdrew money, invested in gold 5.Credit crunch, banks called in loans, stopped lending, banks failed 6.Surviving banks increased capital (money contraction process)

After the stock market crash of 1929 how much of the value of the stock market had been lost by 1932?

90%

What was the highest marginal income tax rate during WW II?

94%

What were the Yellowback notes backed by? Explain how the Yellowback Monetary System emerged.

Backed by treasury bonds and at the same time redeemable in Gold Coin. TheYellowback monetary systememerged in California during the Civil War.California never left the gold standard and it dollars remained gold-backed.These so called yellowbacksfloated against the greenbacks until resumption of the gold standard in 1879.

In the 1960's the Federal Reserve (and the U.S. Treasury) had to intervene in gold markets to try to maintain the official $35 per ounce gold price mandated by the Bretton Woods agreement. How did they do this?

Buy selling gold on global markets

What is the CPI-U?

Consumer Price Index for Urban consumers (CPI-U). This data represents changes in prices of all goods and services purchased for consumption by urban household

In today's political environment, you would associate which political viewpoints with the views of Thomas Jefferson?

Democrats

81. When George W. Bush (Jr.) was president what major changes to the tax code were enacted? Did income tax rates go up or down?

Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003" Bush tax cuts" 1.lowered top marginal income tax rate from 39.5% to 35% 2.Cut capital gains and dividend tax rates, accelerated depreciation write-offs 3.Increased exemption limits for the Alternative Minimum Tax

In 1992 President Bill Clinton is elected. In his first year in office there are tax increases on the wealthy as some of Reagan's tax cuts are reversed. What is the impact on the size of government deficits in the years after this tax increase?

Economy grows -tax revenues rise from economic growth, Deficits shrink

Describe what Executive Order 6102 (April 5, 1933) and Executive Order 6260 (August 23, 1933) did.

Executive Order 6102 (April 5, 1933) a) Outlawed individual or corporate ownership of gold b) All gold coins and gold certificates had to be turned in to Federal Reserve at official rate of $20.67 per ounce c) All bullion turned in at same rated)Fed paid for gold in Federal Reserve Notes "backed by gold" e) Up to $10,000 fine for non-compliance ($186,799.23 in 2017 dollars) Executive Order 6260 (August 23, 1933) a)Outlawed the hoarding of gold b)Outlawed the export of gold or gold money out of the US c)Up to $10,000 fine for non-compliance

The U.S. government borrowed a lot of money from the government of France to help finance the Revolutionary War. After the War, it repaid its entire debt to France.

False

Explain how the structure of the National Currency Act / National Banking Act of 1863/4 helped to finance the Civil War for the North? Use the word "monetization" in your explanation.

From 1863 to 1935, National Bank Notes were issued by banks throughout the country and in US territories. Banks with a federal charter would deposit bonds in the US Treasury. The banks then could issue banknotes worth up to 90 percent of the value of the bonds. The federal government would back the value of the notes—the issuance of which created a demand for the government bonds needed to back them. The program was a form of monetization of the Federal debt

91. What was the Glass Steagall Act and what did it do?

Glass-Steagall (1933 Banking Act) -separate commercial banking andinvestmentbanking. Federal Reserve member banks cannot: i. Deal in non-governmental securities for customers ii. Invest in non-investment grade securities for own portfolio (BBB or better) iii. No underwriting or selling non-government securities iv. Affiliating or sharing employees with companies that do these investment bank activities

What did FDR do on January 31, 1934 and what was the impact on the paper dollar wealth of American citizens?

Gold Reserve Act of 1934 (January 30, 1934) a)Required Federal Reserve to turn over all gold to U.S. Treasury b)Changed the official gold price from $20.67 per ounce to $35.00 per once. The Act changed the value of the Federal Reserve Notes that were issue to pay for the gold. Devaluation = 40.94% of the dollar in terms of gold

How did rising interest rates contribute to declining Federal Reserve members during the 1970's?

If a Fed member they kept deposits at the Fed and earned no interest If not a Fed member they were often allowed to keep much of their legal reserves in T-Bill investments in addition to vault cash so they earned interest. Keeping non-earning deposits at the Fed represented an opportunity cost associated with the interest not earned on those deposits. As inflation and interest rates rose, the yield on T-Bills rose, and the opportunity cost of keeping deposits at the Federal Reserve Banks also rose for the commercial banks that were Fed members Many National Banks gave up their National Charter and switched to a State Charter so they could withdraw funds from the non-earning Federal Reserve Bank deposits and invest those funds in T-Bills

"Greenback" paper money issued to finance the early years of the Civil War in 1861 was referred to as "Demand Notes" because, originally, they could be redeemed for gold. What did the government do in December of 1861 and in the following year?

In December 1861, the government had to suspend redemption, and they declined. (Then the Treasury) authorized paying interest on Demand Notes, which sustained their value

How did Paul Volcker's implementation of monetary policy in the 1980 to 1988 period differ from Alan Greenspan's implementation after 2000?

In July 2000, the Federal Reserve announced that it was no longer setting target ranges for money supply growth?????

The stock market crash signaled the beginning of the Great Depression. According to Milton Friedman, what happened to the money supply during the Great Depression?

It fell/shrunk

Which type of economist would argue that the Great Depression was caused by a widespread loss of confidence that resulted in under consumption and under investment?

Keynesian economists.

In general, what happened to inflation and interest rates during the 1980's?

Low and declining inflation and interest rates

Under Presidents John F. Kennedy and Lyndon Johnson (1960-1968) which of the following occurred?

NOT SURE a) Spending on social programs was expanded. b) Spending on infrastructure projects was expanded. e) There was a dramatic increase in defense spending. g) The Fed was encouraged to keep money supply growing fast enough to maintain a low interest rate environment to help finance the government spending. i) Lower taxes and increased spending resulted in increasing annual budget deficits and faster growth in the national debt. j) Increasing deficits and more government borrowing resulted in "easy" monetary policies that monetized the new debt k) As the money supply increased, inflation increased and the value of the $ fell relative to gold as indicated by the increasing free market price of gold

59. Which of the following is true of the Treasury Accord of 1951?

NOT SURE c) The Treasury-Fed Accord eliminated the obligation of the Fed to monetize the debt of the Treasury at a fixed interest rate. d) The Treasury-Fed Accord increased the independence of the Fed a) In the years following WW II president Harry Truman argued for a monetary policy that focused on keeping interest rates low

A second type of "Greenback" paper money was referred to as "United States Notes" and were issued from 1862 to 1865. Were these notes backed by gold? What happened to their value by the end of the war?

Not backed by gold, the end of the war found the greenbacks trading for only roughly half of their nominal value in gold

After the National Banking Act of 1864 some National Banks in California issued a paper currency called Yellowbacks while National Banks in the rest of the Northern states issued Greenbacks backed by Treasury Bonds. Why were they called Yellowbacks?

Now as Greenbacks lost value due to inflation, many California National Banks issued Notes that were "backed by Treasury Bonds" and at the same time, redeemable in Gold Coin. These notes were called Yellowbacks. (There was a lot of gold in the banks as a result of 1848-1855 California gold rush)

What happened in October of 1979 at the Federal Reserve that changed the trajectory of rising inflation? (Who was it and what did he do?)

Paul Volcker is appointed as Chairman of the Fed in October of 1979 and he shifts the Fed's policy to one of controlling the growth of the money supply and allowing nominal interest rates to find free market equilibrium. This results in an extended deep recession with very high nominal rates as the inflationary forces are purged from the economy

The Second Bank of the United States was known for excessive lending to speculate in agricultural farmland. What was the impact of these activities?

People began to think farm prices could never fall. As an article in a publication called The Cultivator said in 1836: "Who ever heard of a man buying and selling a farm at the same or a lessened price? It is so well understood that the seller is to have more than he gave, that it has almost become a settled principle in the purchase of real estate." The bubble burst with the Panic of 1837, and was followed by the first great depression in United States history, from 1837 to 1843.

When we say "Nixon closed the gold window" what do we mean? What does that act have to do with the evolution of the US $ into a pure fiat currency?

President Nixon "closes the gold window" to other central banks August 15th, 1971a)no more redeeming $US for gold by other Central Banks.b)The dollar completed its evolution into a 100% fiat current

Between 1913 and 1920 what happened to consumer prices once the Fed's was in control of the money supply?

Prices doubled, resulting in consumers losing ½ of their money's buying power

The U.S. Navy had been decommissioned after the end of the Revolutionary War but was reestablished in the late 1700's to do which of the following?

Protect private merchant ships that were owned by wealthy shipping magnates from the French Navy.

What did the Gold Standard Act of 1900 do? What does it have to do with bimetallism?

Put United States on a gold standard. This Act finally settled the argument over Silver backed money that had started with the Coinage Act of 1873

Explain how the practice of buying stock on margin contributed to the market crash.

Related to buying on credit was the practice of buying shares on the margin. This meant you only had to pay 10 or 20% of the value of the shares; it meant you were borrowing 80-90% of the value of the shares. This enabled more money to be put into shares, increasing their value. It is said there were many 'margin millionaire' investors. These margin millionaires got wiped out when the stock market fall came. It also affected those banks and investors who had lent money to those buying on the margin

93. What did the Gramm-Leach Bliley Act (1999) (also known as the Financial Services Modernization Act) do?

Removes many barriers between commercial banking, investment banking, and insurance (repeal last parts of Glass-Steagall) Financial Holding Company (FHC) can diversify activities Allowed commercial banks to enter more risky investment banking activitie

What is stagflation?

Stagflation is defined as slow economic growth occurring simultaneously with high rates of inflation.

During WW II the Federal Reserve's monetary policy was focused on keeping interest rates low to help the government finance the war with low interest Treasury Bonds. What was the impact on the CPI in 1947?

The Consumer Price Index rose 14% in 1947 and 8% in 1948, and the economy was in recession

Explain how the Specie Payment Resumption Act of 1875 solved the inflation problem of the "Greenback" United States Notes that were issued by National Banks during the Civil War.

The Specie Payment Resumption Act of January 14, 1875 was a law in the United States that restored the nation to the gold standard through the redemption of previously-unbacked United States Notes(Greenbacks)and reversed inflationary government policies promoted directly after the American Civil War

Which of the following are true about the paper money issued by the Continental Congress?

The bank notes were backed only by the promise to redeem the notes with silver coins in the future.

What happened to the paper Continental Bank Notes issued in 1775 to finance the Revolutionary War?

They lost almost all their value within 5 years of issue

Describe the role of fiscal policy stimulus under the New Deal. (25 words or less)

The role of fiscal policy stimulus under a Keynesian orientation is to increase consumption and investment in the economy. This is mainly accomplished by government spending on a variety of programs that creates jobs so workers have money to spend.

Describe the role of monetary policy under the New Deal. (25 words or less)

The role of monetary policy under a Keynesian orientation is to provide a low interest rate environment through money creation in order to minimize the cost of government borrowing that is used to finance the fiscal policy spending programs and to encourage borrowing by businesses and individuals.

During WW II, how did the Fed keep interest rates low?

To maintain the pegged rate, the Fed was forced to give up control of the size of its portfolio as well as the money stock. (slide 13 - history notes part 5). So the Fed expanded the money supply to keep rates low.

Toward the end of the 1800's the U.S. developed a new Foreign Policy orientation as it expanded its military power to support American companies that were operating overseas.

True

The War of 1812 is associated with which of the following (more than one may be true)?

a) Government borrows to help finance the war and is $100 million in debt by 1814. b) The Government increased import taxes and instituted property taxes and excise taxes on goods. e) Excessive paper money creation as banks create money to lend to government

Which of the following is true of the Second Bank of the United States (1816-1836)?

a) It acted as fiscal agent for the Federal Government. b) It issued paper notes backed by gold, silver, and bank notes from State banks. c) It was created to help the Government raise funds to pay off War of 1812 debt. d) Excessive money creation and lending for speculation in land created our nation's first "boom, bubble, crash, financial panic" cycle. e) President Andrew Jackson feared control of a powerful central bank by wealthy financiers and vetoed a bill to renew the bank's charter.

In the first few years of the Great Depression, the Hoover Administration did which of the following?

a) Organized a government bailout of the financial industry b) Organized a bailout of the transportation (railroad) industry both a and b

87. The decade of the 1970's was known for which of the following (more than one may be true)?

a) Overall, the 1970's was a period of stagflation. d) Rising gold prices e) Increasing inflation h) Rising government spending

The coinage Act of 1834 did which of the following (more than one may be true)?

a) Raised the price of gold relative to silver. c) Supported the argument for a money that was backed by only gold rather than a money backed by both gold and silver. e) Weakened the Second Bank of the United States by lowering the value of their paper notes that were backed by silver.

In 1971 the Bretton Woods agreement collapsed. Which of the following assets did global investors buy? Which did they sell?

a) the US $ SOLD b) gold -BUY c) the Japanese Yen - BUY d) the Swiss Franc - BUY e) the German Deutschmark -BUY

85. What were the two major factors decreasing government revenues because of the financial crisis?

a)Bush tax cuts b) Recession and slow economic growth depressed revenues further

What were the results of Paul Volcker's policies at the Federal Reserve?

a.Falling inflationary expectations b.Falling nominal interest rates c.Falling oil prices (demand destruction due to conservation efforts) d.Increased economic growth e.1987 Paul Volcker steps down and is replaced by Alan Greenspan f.1987 Stock Market Crash

What was the Smithsonian Agreement? What did it attempt to do? How long did it last?

attempted to establish a new monetary agreement along Bretton Woods format but with devalued $ relative to gold. / 1971 - 1973

In the 1960's the Federal Reserve (and the U.S. Treasury) had to intervene in gold markets to try to maintain the official $35 per ounce gold price mandated by the Bretton Woods agreement. How did they do this?

b) By selling gold on global markets and shifting the supply curve to the right.

48. Franklin D. Roosevelt (FDR) was elected President and took office in 1933. Which of the following is a true statement about this President (more than one may be true)? PART 5, MAYBE 4

b) In terms of economic theory, you would consider him a Keynesian. d) His focus was on fiscal policy stimulus of the economy. NO SE h) He essentially outlawed individual or corporate ownership of gold j) He forced everyone to sell their gold to the Federal Reserve at $20.67 per ounce. k) He outlawed the export of gold or gold money out of the US. l) He raised the official gold price from $20.67 per ounce to $35.00 per ounce. m) He was responsible for a 40.94% devaluation of the paper dollar in terms of gold

89. The decade of the 1980's was known for which of the following (more than one may be true)?

b) Slowing inflation d) Decreasing nominal interest rates e) The Savings & Loan Crisis that was (partially) caused by deregulation f) A deep recession in the first few years and then economic growth

Which of the following were characteristics of the "Free Banking Era" during 1837-1863 (more than one may be true)?

b) State banking authorities regulated reserve requirements and the money supply. e) Only state chartered banks existed. h) Wildcat banks issued paper money that had no gold or silver backing and, as a result, these bank notes rapidly lost their value. i) State banks issued gold coins, silver coins, and paper money backed by gold.

Which of the following is true about the First Bank of the United States (1791-1811) (more than one may be true)?

b) The bank issued paper money backed by gold and silver. d) The bank was forbidden to buy government bonds (to lend money to the government). f) There was strong opposition from other private banks outside of northeastern cities

When the Federal Reserve was first created, it was supposed to do which of the following?

c) Issue Federal Reserve Notes in order to provide a flexible money supply f) Act as a lender of last resort to member banks g) Maintain a check clearing system to speed the clearing of payments between banks h) Regulate all national banks i) Hold National Bank reserves j) Regulate bank reserve requirements

23. Which of the following is true about the National Currency Act (1863) / National Banking Act (1864). (more than one may be true)?

c) It established Office of the Comptroller of the Currency e) Created a Dual Banking System where banks could be either State Banks or National Banks h) All paper money issued by National Banks had to be backed by Treasury Bonds i) Taxed state bank notes 10% to drive them out of existence j) It created Federal Government monopoly control of the money supply through control of the National Bank system

Which of the following are characteristics of a chained consumer price index (Chained CPI-U)? (more than on might be right)

c) Its use results in lower reported rates of inflation. d) It is based on the idea that in a period of inflation consumers will shift their purchasing to lower priced goods so their cost of living rises more slowly.

92. What did the Riegle-Neal Interstate Banking and Branching Act (1994) do?

repeal McFadden Act and allow interstate branching in 1995More geographic competition for banks and more consolidation into large banks

What was the impact of the combination of the Reagan Tax Cuts and increased defense spending on the federal government's deficits from 1980 to 1988?

results in increased deficits and rising national debt

What happened to the free market price of gold after Nixon closed the gold window?

rose

What did the 16th Amendment to the Constitution do?

the establishment of a permanent income tax

88. Who is Paul Volcker and why is he so important for monetary policy from 1979 to 1984?

when Paul Volcker took over as Chairman of the Board of Governors of the Federal Reserve in October of 1979 he shifted the Fed Policy Orientation to controlling the growth of the money supply in order to stop the increasing inflation problem