### FRONT PAGE### Fiscal Policy in the Great DepressionIn 1931 President Herbert Hoover observed, “Business depressions have been recurrent in the life of our country and are but a transitory.” Rather than proposing fiscal stimulus, Hoover complained that expansion of public works programs had unbalanced the federal budget. In 1932 he proposed cutbacks in government spending and higher taxes. In this view, the “unquestioned balancing of the federal budget is the first necessity of national stability and is the foundation of further advances.”Franklin Roosevelt shared this view of fiscal policy. He criticized Hoover for not balancing the budget and in 1933 warned Congress that “all public works must be considered from the point of view of the ability of the government treasury to pay for them.”As the accompanying figure shows, the budget deficit persisted throughout the Great Depression. Structural deficits were the result of a declining economy, not stimulative fiscal policy. The structural deficit actually increased from 1931 to 1933 (see figure), when fiscal restraint was enforced. This restrained aggregate spending at a time when new sources of spending were needed for increasing sales. Only when the structural deficit changed to a significant fiscal stimulus did recovery begin. World War II did fiscal policy have a significant effect on the economy, defense expenditures jumped from $2.2 billion in 1939 to $87.4 billion in 1944!Source: Brouse, E. Cary. "Fiscal Policy in the Thirties: A Reappraisal," American Economic Review. December 1956. Table 1, The American Economic Association, 1956.### Graph DescriptionThe graph titled "Budget Balances As a Percent of GNP" spans the years 1929 to 1939. The x-axis represents the years, and the y-axis indicates the budget balance as a percentage of Gross National Product (GNP), ranging from -7.0 to +5.0.- **Actual Budget Deficits** are represented by a red line.- **Structural Deficits and Surpluses** are represented by a green-faded area.From 1929 to 1931, the actual budget deficit increased. In 1931, there is a noticeable peak in the structural deficit, indicating fiscal restraint. The structural deficit continued to widen from 1931 to 1933. Thereafter, the actual and structural deficits experienced fluctuations but remained relatively high throughout the Great Depression. The graph highlights the period

Fiscal restraint refers to a deliberate policy or action taken by a government to reduce government…

Refer to the Front Page and the figure to answer two questions. FRONT PAGE Fiscal Policy in the Great Depression in 1931 President Herbert Hoover observed, "Business depressions have been recurrent in the life of our country and are but transitory." Rather than proposing fiscal stimulus, Hoover complained that expansion of public works programs had unbalanced the federal budget. In 1932 he proposed cutbacks in government spending and higher taxes. In his view, the "unquestioned balancing of the federal budget is the first necessity of national stability and is the foundation of further recovery." Franklin Roosevelt shared this view of fiscal policy. He criticized Hoover for not balancing the budget and in 1933 warned Congress that "all public works must be considered from the point of view of the ability of the government treasury to pay for them." As the accompanying figure shows, the budget deficit persisted throughout the Great Depression But these deficits were the result of a declining economy, not stimulative fiscal policy. The structural deficit actually decreased from 1931 to 1933 (see figure), when fiscal restraint was pursued. This restraint reduced aggregate spending at a time when producers were desperate for increasing sales. Only when the structural deficit was expanded tremendously by spending during World War II did fiscal policy have a decidedly positive effect. Federal defense expenditures jumped from $2.2 billion in 1940 to $87.4 billion in 1944 Source Brown, E. Carey, "Fiscal Policy in the Thirties A Reappraisal," American Economic Review, December 1956. Table 1, The American Economic Association, 1956. BUDGET BALANCES (billions of dollars per year) +$5.0 +4.0 +3.0 +2.0 +1.0 0 -1.0 -2.0 -3.0 -4.0 -5.0 -6.0 -7.0 restraint-> Fiscal Actual budget deficits Structural deficits and surpluses 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 YEAR Instructions: Enter your responses as a whole number. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers. a. How much fiscal restraint or stimulus occurred between 1931 and 1933? $ billion of fiscal (Click to select) occurred between 1931 and 1933. b. By how much did this policy change aggregate demand if the MPC was 075? billion