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The importance of the rate of monetary growth

TO AS LTD., INC., GMBH, OR S.A.? | THE STRATEGY OF A COMPANY | 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 |


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Monetarism begins and ends with one obsession: the rate of growth of the money supply. According to monetarists, most of our major economic problems, especially inflation and recession, are due to the Federal Reserve's mismanagement of our rate of monetary growth.

Milton Friedman, an economist who did exhaustive studies of the relationship between the rate of growth of the money supply and the rate of increase in prices, reached a couple of not surprising conclusions. First, the United States has never had a serious inflation that was not accompanied by rapid monetary growth. Second, when the money supply has grown slowly, the country has had no inflation.

In a study of the monetary history of the United States during the period of nearly a century after the Civil War, Friedman and his longtime collaborator Anna Jacobson Schwartz reached this conclusion: "Changes in the behavior of the money stock have been closely associated with changes in economic activity, money income, and prices." Once again, the answer to all important economic questions is the rate of growth of the money supply.

Building on the quantity theory of money, the monetarists agreed with the classicals that when the money supply grows, the price level rises, albeit not at exactly the same rate. But they refuted Keynes's argument that if the money supply were raised during a recession, people might just hold on to these added funds. Like the classicals, the monetarists assumed that to get it is to spend it - not necessarily on consumer goods, but on stocks, bonds, real estate, and other noncash assets.

If people did spend this additional money, the prices of what they bought would be bid up. In other words, the monetarists were saying that the quantity theory basically holds true.

So far, so good. Now for recessions. What causes them? When the Federal Reserve increases the money supply at less than the rate needed by business - say, anything less than 3 percent a year - the economy is headed for trouble. Sometimes, in fact, the Fed does not let it grow at all and may even cause it to shrink slightly.

By and large the facts have borne out the monetarists' analysis. Without a steady increase in the money supply of at least 3 percent a year, there is a high likelihood of a recession.

 

13.2 Put the given below statements in the same order as they appear in the text.

 

1. Зміни в поведінці грошового запасу тісно пов'язані зі змінами в економічній діяльності, грошовому доході і цінах.

2. Сполучені Штати ніколи не мали серйозної інфляції, котра б не супроводжувалася швидким ростом грошової маси.

3. Монетаристи стверджували, що більшість економічних проблем, а саме: інфляція та спад виникають через недостатній контроль за ростом грошової маси.

4. Коли грошовий запас збільшувався поступово, в країні не було інфляції.

5. Без постійного збільшення грошової маси, в крайньому випадку, на 3% в рік, існує висока імовірність зниження економічної активності.

6. Подібно до класиків, монетаристи припускали, що отримати додаткові кошти означає витратити їх, не обов'язково на споживчі товари, а на акції, облігації, нерухомість та інші безготівкові активи.

 

13.3. Sum up the text in 7-8 sentences and present your summary in written form.

 


14.1 Read texts 15 and 16. Write down and translate four basic propositions of monetarism.

 

TEXT 15

 


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