Study Questions – Midterm Exam
Economics 639 / Fall 2013
Mark Vaughan
The midterm exam is a proper subset of the questions below. Please note some questions overlap.
1. Each of the following statements is false (or not quite true). Write a short essay for each one
explaining why it is false.
a. The Great Recession and the Great Contraction were comparable in terms of severity.
b. The Great Depression was primarily a U.S. phenomenon.
c. Consumer debt did not play an important role as a propagation mechanism during the
Great Contraction.
d. Herbert Hoover’s approach to the Depression was initially “laissez faire” – an approach
that had beneficial effects on the economy
e. The stock market boom and bust of the late 1920s did not play a significant role in
bringing on the Great Contraction.
f.
Fiscal policy played a major role in ending the Great Depression.
g. The Great Depression was largely over in the U.S. by 1937.
h. The Gold Standard played an insignificant role in the Great Contraction.
i.
The increase in reserve requirements in 1936 and 1937 did not play a significant role in
the recession of 1937-38 because the large levels of excess reserves reflected weak loan
demand at commercial banks.
j.
Deficit spending during World War II was the principal factor responsible for the end of
the Great Depression.
k. New Deal policies such as the National Industrial Recovery Act and the Wagner Act
were not important factors in prolonging the Great Depression.
l.
New Deal policies played no role in the recovery from the Great Contraction.
2. What role did the bank panics of 1930-33 play in the Great Contraction? How do bank panics
affect the money supply? Why didn’t the Fed inject the liquidity necessary to start the bank
panics?
3. Bernanke argued that bank failures contributed to the Great Depression through a channel other
than monetary policy. What was that channel? What evidence does he provide? What do Miron
and Rigol have to say about Bernanke’s evidence?
4. List and discuss the monetary policy mistakes that contributed to the length/depth/severity of the
Great Depression.
5. Write an essay describing the major shocks (or factors) that depressed the economy from 1928 to
1933.
6. List and discuss the various factors that contributed to the length of the Great Depression (and the
persistence of high unemployment).
7. What were the various shocks that contributed to the Roosevelt Recession of 1937-38? Which
one was the most important? Why did the Fed think an increase in reserve requirements was
necessary?
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8. What is the Modigliani-Miller theorem?
results?
What assumptions are necessary to produce MM
9. List and discuss eight, interrelated puzzles about financial structure. What financial frictions (i.e.,
departures from the Modigliani-Miller assumptions) can be used to explain each of these puzzles.
10. Do banks exist in a Modigliani Miller world? According to modern finance theory, why do banks
exist? Why do shocks to banking have the potential to affect the real economy?
11. What is regime uncertainty? Why role did it play in prolonging the Great Depression? What
evidence does Higgs adduce in support of the importance of regime uncertainty? Baker, Bloom,
and Davis argue that policy uncertainty has the potential to affect output (i.e., slow the current
recovery). How do they make their argument? Why is their paper more persuasive than Higg’s
paper?
12. What factors are commonly cited as being responsible (in some degree) for the housing/financial
crisis?
13. What, according to Roberts, were the most important factors in bringing on the financial crisis?
Explain.
14. What, according to Kling, was the most important factor in bringing on the financial crisis?
Explain.
15. Some argue the housing boom was fueled by easy money, that the Fed held interest rates “too low
for too long.” What is the Taylor Rule? Use the Taylor Rule to explain what is meant by
“holding interest rates too low for too long?”
16. What is unusual about the recovery from the Great Recession? What three factors are generally
looked to as explanations? According to Mulligan and Taylor, what policy mistakes helped slow
down the recovery? Explain.
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