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The basic propositions of monetarism

FINANCIAL FORECASTING | CAREERS IN FINANCE | WHAT IS ACCOUNTING? | FINANCIAL ACCOUNTING | For the Year Ended August 31, 20 XX | TYPES OF ACCOUNT | CLASSICAL ECONOMICS | KEYNESIAN ECONOMICS | KEYNESIAN ECONOMICS | THE IMPORTANCE OF THE RATE OF MONETARY GROWTH |


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(Part II)

 

(3) Expansionary Monetary Policy Will Only Temporarily Reduce the Unemployment Rate. The first two basic propositions partially explain the third. First, when monetary growth speeds up, output is expanded, but in the long run only prices will rise. Because rising output would lower the unemployment rate, in the short run unemployment is reduced. But in the long run, an increase in the rate of monetary growth will raise prices, not output, so the unemployment rate will go back up. We'll come back to why this happens.

The second basic proposition states that expansionary monetary policy only temporarily depresses interest rates. In the short run, more money means lower interest rates. These lower interest rates encourage more investment and, consequently, less unemployment.

But in the long run the added money in circulation causes inflation, which, in turn, raises interest rates. As interest rates rise, investment declines and the unemployment rate goes back up.

The monetarists have explained the temporary reduction in the unemployment rate more directly. As labor union members begin to anticipate inflation, they will demand higher wage rates. New labor contract settlements will reflect the higher cost of living, but these higher wage settlements will price some workers out of the market, thus raising the unemployment rate.

(4) Expansionary Fiscal Policy Will Only Temporarily Raise Output and Employment. Here we have another conflict between the monetarists and the Keynesians. The Keynesians believe fiscal policy, particularly heavy government spending, will pull us out of a recession. But how is this spending going to be financed? By borrowing. The Treasury goes into the market for loanable funds and borrows hundreds of billions of dollars to finance the deficit.

The monetarists point out that such huge government borrowing comes directly into conflict with that of business firms and consumers. Not only will it be harder for these groups to borrow, but interest rates will be driven up. This effect represents, according to the monetarists, a substitution of public for private spending. All we're really doing is spending more on government goods and services and less on consumer and investment goods and services. Aggregate demand is not increased.

How well would a budget surplus restrain inflation? Not very, say the monetarists. The Treasury would not be borrowing now, but rather repaying part of the national debt, which would tend to push down interest rates and make borrowing easier. Private borrowing would replace public borrowing. The hoped-for restraint would not materialize because private borrowers would now be spending these borrowed funds on goods and services. In effect, then, we would still have the same level of spending.

14.2. Find in the text the English equivalents of these words and word-combinations:

1. стежити

2. міркування, роздуми

3. тиснути на гальмо

4. політика, подібна до ривка

5. надихати, вселяти

6. накачувати, підкачувати

7. обмежені засоби

8. супроводжувати

9. подвоєння показників

10. прискорити хід

11. підстрибувати, стрімко рости

12. стривожений чимось

13. підвищувати, наганяти (ціну)

14. чекати, передбачати

15. стримувати, затримувати

16. призупиняти, погіршувати

17. стимулювати, підтримувати

18. розрахунки по контракту

19. вартість життя

20. установити високі ціни на ринку

21. позиковий капітал

22. підскочити

23. заміна, заміщення

24. стримувати, обмежувати

25. фактично, по суті

26. казначейство

27. національний борг

28. мати тенденцію

 

14.3 Read the texts again and answer the questions:

 

1. Why did the monetarists blame the Fed?

2. What was the monetarist reasoning with regard to the Fed's action over the course of a business cycle?

3. What were the Fed's actions for the period of 1960-1980?

4. How will changes in the monetary growth vary inflation and interest rates?

5. Why will expansionary monetary policy only temporarily reduce the unemployment rate (according to the monetarists)?

6. What is the essence of the conflict between the monetarists and the Keynesians?

 

14.4. Define the key sentences of each paragraph. Explain your choice.

 

14.5. Using the key words speak on four basic propositions of monetarism.

 

15.1 Read text 17.

TEXT 17

 


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