Question

"The Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy." - Milton Friedman The quote by Milton Friedman supports his belief that the federal government should A) decrease the role of the private economy. B) increase their participation in fiscal policy. C) increase their participation in monetary policy. D) decrease their participation in monetary policy.

Answer 1

The correct answer is B.

Milton Friedman (1912 - 2006) was an economist who received the 1976 Nobel Prize in Economics for his studies in consumption analysis, monetary history and complex theories related to stabilization, including goverment intervention policies.

Presidents such as Hoover or Coolidge, who had governed in the decade before the Great Depression, supported laisez-faire economic measures, that consisted on free functioning of the markets with minimum goverment interventionism. Markets alone, would produce the most efficent outcomes, according to his viewpoint. Therefore, the policies introduced by these governments, involved minimum government regulation of the economic activity by the goverment.

This is why Friedman, such as many others, claimed for alternative policies which involved goverment intervention for stabilization purpouses, using the mechanisms of the fiscal policy. Subsequent goverments did apply such measures, being the best example the New Deal, based on Keynesian economics and implemented by President Roosevelt. The New Deal aimed to create job positions for the large unemployed sectors of the US population, by increasing public expenditure (one of the variables of the fiscal policy) in public works and hence, creating employment to undertake those works.

Answer 2

D) decrease their participation in monetary policy.

Explanation:

The Great Depression had two main causes. The overproduction and expansion of unbridled credit by banks. The credit of an economy is regulated by the Government - currently by the Federal Reserve - which institutes monetary policy, which is the instrument that regulates the amount of money and credit available in the economy. Monetary policy can be used to induce warming or cooling of the economy through the interest rate and the open market. According to Friedman, the US government erred in conducting monetary policy by lowering the interest rate to a point that allowed banks to adopt risky lending practices. In Friedman's view, monetary policy can not be an instrument used by the government to stimulate the economy.