Thursday, December 1, 2011

Monetary Policy and the Great Depression

“Friedman and Schwartz claimed to have refuted Keynes's pessimism about the effectiveness of monetary policy in depression conditions. "The contraction" of the economy, they declared, "is in fact a tragic testimonial to the importance of monetary forces."”

During the Great Depression, the stock market crash caused fear and uncertainty among the people, so they consumed less durable goods and this led to a price level decline. We learned in the class that the Great Depression was associated with decline in interest. Because the exchange rate was fixed by the “Gold Standard” the government had to decrease the money supply to increase the US interest rate to attract foreign investors, but this article doesn’t mention any information about the “Gold Standard” policy at that time.

http://economistsview.typepad.com/economistsview/2007/03/monetary_policy.html

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