Refer to the "In the News" and the figure to answer two questions IN THE NEWS 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. +$5.0 +4.0 +3.0 +2.0 Structural deficits and surpluses +1.0 < Prev s of dollars per year) 0 Next > +$5.0 +4.0 +3.0 +2.0 Structural deficits and surpluses +1.0 0 -1.0 -2.0 -3.0 -4.0 -5.0 -6.0 Actual budget deficits -7.0 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 sig in front of those numbers. a. How much fiscal restraint occurred between 1937 and 1939? billion of fiscal (Click to select) occurred between 1937 and 1939. b. By how much did this policy change aggregate demand if the MPC was 0.8? $ billion Fiscal restraint- 4 of 10