Question

1. Which of the following shocks did NOT contribute to the Great Depression

   		rising interest rates
   		stock market crash
   		bank panics
   		rising budget deficits

2. Both the Great Recession and the Great Depression

   		had unemployment peaking at 10%
   		were caused by short-run aggregate supply shocks
   		were associated with falling prices
   		were associated with a financial crisis

3. During the Great Depression, the lack of which safeguard for depositors created the incentive for bank runs?

   		Interest rate caps
   		unemployment insurance
   		deposit insurance
   		social security

4. When depositors withdraw from the banking system,

   		economic activity improves because people spend their money
   		economic activity declines because banks are unable to make loans
   		economic activity is unaffected because banks do not produce goods or services
   		none of the above

Answer 1

A) option D is correct,

At 1929 ,time of great depression ,the US has a budget surplus of 734 millions.

Which later turned into deficit to revive the economy by lowering taxes and Increasing government spending.

The nominal interst was almost stable but due to deflation real interst rate was rising which makes things worse.

B) option C

In both , Decrease in aggregate demand leads to fall in prices .

C)option C is right,

Deposit insurance was safeguard which created the incentive foe bank runs. Because people was afraid of losing their money so they withdrawal all their money from banks and bank go runs which makes things worse during great depression. So that is why In 1936 deposit insurance act was inacted.

D) because it is not guaranteed that people will spend their money if they withdrawal . It is possible that they just hold their money at themselves. So it will not improve economic activity.

While on other hand withdrawal of deposits will reduce the loanable funds of banks which will decrease their loans amount and result in decline in economic activity.

Option B is correct