Econ 134 (Professor Regis Barnichon, Fall 2023)

Macroeconomic Policy from the Great Depression to Today

A major lesson is that the Gold Standard was terrible for economic growth and FDR got the country out of the depression by switching to paper money instead. The issue with the G.S. is that the money supply was determined by the amount of gold in the economy. To increase the supply, they had to create more gold in the economy. During peak business seasons to match the high money demand, the FED had to use high interest rates to avoid running out of money which slowed down the economy.

To stimulate the economy, more money had to be created so that money's value was cheaper, prices will increase, and people will start spending more to get out of the Great Depression. The switch to paper money allowed the FED to print more money by selling bonds which worked.

During the Great Recession, alongside printing more money by selling bonds to stimulate the economy, the FED also bought assets from private companies and acted as a lender when Wall Street failed to do so. This increased both money and credit supply which stimulated the economy.

A bad economy is a self-feeding cycle. Wall street fails, they are lending less money by increasing interest rates, businesses can afford less workers. Less workers means lower wages, lower wages leads to lower spending which further hurts businesses.

Some other minor lessons were regression analysis and the difference in differences approach.

You get two groups: A and B. You measure their weight in Time X.

You give Group B a pill for weight loss and measure both groups' weights in Time Y.

You find weight change for Group A.

You find weight change for Group B.

Then you find the difference between the two changes to find the effect of the pills.

If you can't find a good variable, use an IV to account for compounding variables.

Last major lesson: relationship between supply and demand.

If interest rates go up, money demand falls, (assuming money supply is constant), less money lended to businesses, less economic activity, prices fall. (Vice-versa)