The fall of its military rival, the Soviet Union, in 1989 allowed the United States to significantly reduce its defense spending in subsequent years. Using the data in the following table from the Economic Report of the President, replicate Figure 32-2 for the 1990-2000 period. Given the strong economic growth in the United States during the late 1990s, why would a Keynesian see the reduction in defense spending during the 1990s as a good thing?

In the modern world, central banks are free to increase or reduce the money supply as they see fit. However, some people harken back to the “good old days” of the gold standard. Under the gold standard, the money supply could expand only when the amount of available gold increased.

a. Under the gold standard, if the velocity of money were stable when the economy was expanding, what would have had to happen to keep prices stable?

b. Why would modern macroeconomists consider the gold standard a bad idea?