America's Great Depression - Chapter 1

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  • 1/10 Questions

    Business _________ are simply the results of changes in economic data and are fully explained by economic theory.

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About This Quiz

This is a 10-question quiz on Chapter 1: Positive Theory of the Cycle from America's Great Depression by Murray Rothbard.

Economic Theories Quizzes & Trivia

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  • 2. 

    What is one positive thing the government can do to effectively respond to a depression?

    • Drastically lower its relative role in the economy.

    • Prevent liquidations and bankruptcies.

    • Keep wage rates up.

    • Stimulate consumption and discourage saving.

    Correct Answer
    A. Drastically lower its relative role in the economy.
    Explanation
    Lowering the government's relative role in the economy during a depression can be a positive step because it allows the private sector to take a larger role in driving economic growth. By reducing regulations and government intervention, businesses have more freedom to innovate, invest, and create jobs. This can lead to increased productivity and economic activity, helping to lift the economy out of a depression. Additionally, reducing the government's role can also help to reduce the burden on taxpayers and prevent excessive government spending, which can contribute to economic instability.

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  • 3. 

    What is the benefit of credit contraction when it follows a period of credit expansion?

    • It causes the government to increase spending.

    • It speeds the market’s adjustment process.

    • It reduces the amount of unemployment caused by inflation.

    • It causes housing prices to decline.

    Correct Answer
    A. It speeds the market’s adjustment process.
    Explanation
    Credit contraction following a period of credit expansion speeds up the market's adjustment process. During a period of credit expansion, there is an increase in borrowing and lending, leading to excessive credit in the market. This can result in asset price bubbles and unsustainable economic growth. When credit contraction occurs, it reduces the availability of credit, leading to a decrease in borrowing and lending. This helps to correct the imbalances in the market, deflate asset price bubbles, and allow the economy to adjust to more sustainable levels. Therefore, credit contraction speeds up the market's adjustment process.

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  • 4. 

    What is the Austrian explanation for the perpetual recurrence of business cycles?

    • Seasonal fluctuations systematically introduce instability into the system.

    • More gold is always being mined and added to the global money supply.

    • Banks and governments inflate credit when they can.

    • The decreasing marginal utility of investment goods.

    Correct Answer
    A. Banks and governments inflate credit when they can.
    Explanation
    The Austrian explanation for the perpetual recurrence of business cycles is that banks and governments inflate credit when they can. This means that they increase the supply of money in the economy, leading to an expansion of credit and investment. However, this expansion is unsustainable and eventually leads to a bust or recession. The Austrian school of economics argues that this boom-bust cycle is caused by the manipulation of the money supply by central banks and governments, rather than by external factors such as seasonal fluctuations or the increasing marginal utility of investment goods.

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  • 5. 

    What causes otherwise rational businessmen to invest too much in higher-order capital goods?

    • Inexpensive consumer goods

    • Government subsidies

    • Expropriated labor

    • Bank credit inflation

    Correct Answer
    A. Bank credit inflation
    Explanation
    Bank credit inflation can cause otherwise rational businessmen to invest too much in higher-order capital goods. When there is an increase in bank credit, it leads to an expansion of the money supply, which lowers interest rates. Lower interest rates make borrowing cheaper and more attractive, encouraging businessmen to take on more debt to invest in capital goods. This can create a situation where there is an oversupply of higher-order capital goods, as businessmen may overestimate the demand for these goods due to the artificially low interest rates.

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  • 6. 

    This determines the individual's proportion of consumption to saving or investment.

    • Time preferences

    • Debt-to-income ratio

    • Interest rates

    • Income level

    Correct Answer
    A. Time preferences
    Explanation
    Time preferences refer to an individual's inclination towards either immediate or delayed consumption or investment. It determines the proportion of their income that they choose to save or invest instead of spending it. People with high time preferences tend to prioritize immediate consumption, while those with low time preferences prioritize saving or investment for the future. Therefore, time preferences directly influence an individual's consumption-to-saving or investment ratio.

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  • 7. 

    What are the two common misconceptions of the Austrian theory of the trade cycle?

    • Gold reserve money and inflation.

    • Malinvestment and bank credit expansion.

    • Overinvestment and the assumption of full employment.

    • Interest rates and underemployment.

    Correct Answer
    A. Overinvestment and the assumption of full employment.
    Explanation
    The Austrian theory of the trade cycle suggests that overinvestment and the assumption of full employment are two common misconceptions. Overinvestment refers to the belief that excessive investments in certain sectors of the economy can lead to economic instability and eventual downturns. The assumption of full employment implies that the economy is always operating at its maximum potential, which is not always the case. These misconceptions can lead to flawed policies and decision-making, hindering economic growth and stability.

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  • 8. 

    What is the main problem that a theory of depression must explain?

    • Why is the gross domestic product contracting instead of expanding?

    • Why is there a sudden general cluster of business errors?

    • Why is unemployment increasing?

    • Why is inflation increasing at the same time as unemployment?

    Correct Answer
    A. Why is there a sudden general cluster of business errors?
    Explanation
    A theory of depression must explain the main problem of why there is a sudden general cluster of business errors. This is because depression often leads to a decline in economic activity and can cause businesses to make mistakes or poor decisions, resulting in a cluster of errors. Understanding why this occurs is crucial for developing effective strategies to prevent or mitigate the negative impacts of depression on businesses and the economy as a whole.

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  • 9. 

    Cycle theory has been integrated into the general economics theories of which two economists?

    • Mises and Hayek

    • Marx and Keynes

    • Mises and Schumpeter

    • Samuelson and Ricardo

    Correct Answer
    A. Mises and Schumpeter
    Explanation
    The correct answer is Mises and Schumpeter. Cycle theory, also known as business cycle theory, has been integrated into the general economics theories by Ludwig von Mises and Joseph Schumpeter. Mises developed the Austrian business cycle theory, which explains how fluctuations in the economy are caused by the expansion and contraction of credit. Schumpeter, on the other hand, focused on the role of innovation and entrepreneurship in driving economic cycles. Both economists made significant contributions to our understanding of business cycles and their integration into general economics theories.

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  • 10. 

    Which is not a phase of the business cycle set into motion by bank credit expansion, according to Rothbard?

    • The inflationary boom

    • The crisis

    • The deflationary bust

    • The depression recovery

    Correct Answer
    A. The deflationary bust
    Explanation
    According to Rothbard, the deflationary bust is not a phase of the business cycle set into motion by bank credit expansion. This means that when there is a contraction in the economy and a decrease in prices, it is not a result of bank credit expansion but rather other factors. The inflationary boom, crisis, and depression recovery are all phases that can be triggered by bank credit expansion, but the deflationary bust is not.

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  • Mar 19, 2023
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    ProProfs Editorial Team
  • Nov 07, 2008
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    Voxday
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