Question

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

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

During the Great Depression, the Federal Reserve

		lowered interest rates to push AD to the right
		made loans to banks to prevent their collapse during a bank run
		gave guidance to banks during the banking panic
		none of the above

During the Great Depression, the federal government

		increased spending to push AD to the right
		decreased taxes to push AD to the right
		raised taxes to balance the budget - making the decline in economic activity worse
		none of the above

Answer 1

1. deposit insurance

Explanation: Deposit insurances establishes the trust of people in the banking system.

2. Economic activity declines because banks are unable to make loans

Explanation: When people withdraw money from the banking system, banks have less funds to loan out.

3. None of the above

Explanation: The Fed failed to do any of the above and this made the crisis worse.

4. Increased spending to push AD to the right

Explanation: The increase in Fed spending increased the aggregate demand.