...Discuss the difference between Keynesians and monetarists over the effectiveness of fiscal and monetary policy in the IS-LM framework. Introduction In economics there are two main schools of thought; these schools differ in their belief of what policies are best suited to attain full employment in the economy. Keynesians tend to favour demand side policies and are more prone to intervene in the market and therefore prefer to use fiscal policy whilst monetarists believe adjustments in money supply is more appropriate in stabilising the market ,therefore preferring monetary policy. In this essay I will discuss the views of Keynesians and monetarists regarding the effectiveness of monetary and fiscal policies in controlling aggregate demand through the IS-LM framework. I will first provide a brief description of the curves explaining their formation and what they represent and then I will go on to examine monetary and fiscal policy within the IS-LM framework. Finally, I will examine the views of monetarist and Keynesians regarding the effectiveness of both policies in raising the level of national l income and also consider the extreme cases. IS-LM framework The IS-LM model was initially developed by John Hicks in 1937 but was made popular in 1949 by Hansen in order ‘to provide a framework for analyzing the factors determining the level of aggregate demand’. The IS-LM model is a short run model of the determination of output. It shows the unique combination of income...
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...Question 1 Introduction In economics there are two main schools of thought; these schools differ in their belief of what policies are best suited to attain full employment in the economy. Keynesians tend to favour demand side policies and are more prone to intervene in the market and therefore prefer to use fiscal policy whilst monetarists believe adjustments in money supply is more appropriate in stabilising the market ,therefore preferring monetary policy. In this question I will discuss the views of Keynesians and monetarists regarding the effectiveness of monetary and fiscal policies in controlling aggregate demand through the IS-LM framework. I will first provide a brief description of the curves explaining their formation and what they represent and then I will go on to examine monetary and fiscal policy within the IS-LM framework. Finally, I will examine the views of monetarist and Keynesians regarding the effectiveness of both policies in raising the level of national l income and also consider the extreme cases. The IS-LM model was initially developed by John Hicks in 1937 but was made popular in 1949 by Hansen in order ‘to provide a framework for analysing the factors determining the level of aggregate demand’. The IS-LM model is a short run model of the determination of output. It shows the unique combination of income and interest rates that lead to an equilibrium in both the goods and money market at the same time (Begg, 2008). The IS-LM model is presented...
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... and Monetary Policy Dominance: Post Keynesians and the "Fair Rate" of Interest Author(s): Louis-Philippe Rochon and Mark Setterfield Source: Journal of Post Keynesian Economics, Vol. 30, No. 1 (Fall, 2007), pp. 13-42 Published by: M.E. Sharpe, Inc. Stable URL: http://www.jstor.org/stable/27746784 . Accessed: 28/08/2013 13:51 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp . JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. . M.E. Sharpe, Inc. is collaborating with JSTOR to digitize, preserve and extend access to Journal of Post Keynesian Economics. http://www.jstor.org This content downloaded from 140.159.34.46 on Wed, 28 Aug 2013 13:51:45 PM All use subject to JSTOR Terms and Conditions LOUIS-PHILIPPE ROCHON AND MARK SETTERFIELD Interest rates, income distribution, and monetary policy dominance: Post Keynesians and the "fair rate" of interest Abstract: paper In light of the growing interest in "new consensus" models, Post Keynesian alternatives to the Taylor rule. It identifies this two examines distinctive approaches toPost Keynesian interestratepolicy...
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...Keynesians and Monetarists over the Effectiveness of Fiscal and Monetary Policy in the Is-Lm Framework In: Business and Management Keynesians and Monetarists over the Effectiveness of Fiscal and Monetary Policy in the Is-Lm Framework Discuss the difference between Keynesians and monetarists over the effectiveness of fiscal and monetary policy in the IS-LM framework. Introduction In economics there are two main schools of thought; these schools differ in their belief of what policies are best suited to attain full employment in the economy. Keynesians tend to favour demand side policies and are more prone to intervene in the market and therefore prefer to use fiscal policy whilst monetarists believe adjustments in money supply is more appropriate in stabilising the market ,therefore preferring monetary policy. In this essay I will discuss the views of Keynesians and monetarists regarding the effectiveness of monetary and fiscal policies in controlling aggregate demand through the IS-LM framework. I will first provide a brief description of the curves explaining their formation and what they represent and then I will go on to examine monetary and fiscal policy within the IS-LM framework. Finally, I will examine the views of monetarist and Keynesians regarding the effectiveness of both policies in raising the level of national l income and also consider the extreme cases. IS-LM framework The IS-LM model was initially developed by John Hicks in 1937 but was made popular...
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...There are two powerful tools our government and the Federal Reserve use to steer our economy in the right direction: fiscal and monetary policy. When used correctly, they can have similar results in both stimulating our economy and slowing it down when it heats up. The ongoing debate is which one is more effective in the long and short run. Fiscal policy is when our government uses its spending and taxing powers to have an impact on the economy. The combination and interaction of government expenditures and revenue collection is a delicate balance that requires good timing and a little bit of luck to get it right. The direct and indirect effects of fiscal policy can influence personal spending, capital expenditure, exchange rates, deficit levels and even interest rates, which are usually associated with monetary policy. Fiscal Policy - the Keynesian School Fiscal policy is often linked with Keynesianism, which derives its name from British economistJohn Maynard Keynes. His major work, "The General Theory Of Employment, Interest And Money," influenced new theories about how the economy works, and is still studied today. He developed most of his theories during the Great Depression and Keynesian theories have been used and misused over time, as they are a popular and are specifically applied to mitigate economic downturns. In a nutshell, Keynesian economic theories are based on the belief that proactive actions from our government are the only way to steer the economy. This...
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...Post-Keynesian Economics Post-Keynesian economics is a school of economic thought with its origins in The General Theory of John Maynard Keynes, although its subsequent development was influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor and Paul Davidson. Keynes' biographer Lord Skidelsky writes that the post-Keynesian school has remained closest to the spirit of Keynes' work, particularly in his monetary theory and in rejecting the neutrality of money. Introduction Post-Keynesian economists maintain that Keynes' theory was seriously misrepresented by the two other principle Keynesian schools: neo-Keynesian economics which was orthodox in the 1950s and 60s - and by New Keynesian economics, which together with various strands of neoclassical economics has been dominant in mainstream macroeconomics since the 1980s. Post-Keynesian economics can be seen as an attempt to rebuild economic theory in the light of Keynes's ideas and insights. However even in the early years in the late 1940s post-Keynesians such as Joan Robinson sought to distance themselves from Keynes himself, as well as from the then emergent neo-Keynesianism. Some post-Keynesians took an even more progressive view than Keynes with greater emphases on worker friendly policies and re-distribution. Robinson, Paul Davidson and Hyman Minsky were notable for emphasising the effects on the economy of the practical differences between different types of investments in contrast to Keynes more abstract...
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...thought. The first school I will be discussing is the Keynesian school of economic thought followed by, the Monetarist and concluding with the Austrian school of economic thought. Throughout this essay I will explain and discuss the key components, philosophy and history of each of the following. I also plan on discussing how each school is accepted today in society and what the future of these schools hold. To concluded the essay, I will elaborate on which school I believe is more relevant in todays society and which economic school of thought I believe is best for our society today. The Keynesian school of economic thought, is a theory based on total spending in an economy, and the potential results on inflation and input. Keynesian believe that aggregate demand is highly influenced by several economic factors and decisions. Some of those decisions include; monetary, fiscal policies as well as changes in aggregate demand. "According to Keynesian theory, changes in aggregate demand, whether anticipated or unanticipated, have their greatest short-run effect on real output and employment, not on prices". Summarizing the previous quote, Keynesians in general believe that the short run can't infer what can or shall occur in the long run. In todays society many people would agree that prices and wages increase promptly with any sudden change in supply and demand, but that is a different case for the Keynesians. "Keynesians do not think that the typical level of unemployment is...
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...Executive Summary The topic of this paper is mainly discussed on the causes of inflation by explaining how the sustained inflation occurs as well as the role of played by monetary policy in the inflation process. The author in this paper agreed that sustained inflation is always and everywhere a monetary phenomenon and this has been agreed by both monetarist and Keynesian assumption. Besides that, the author also mentioned that we need to understand why inflationary monetary policy occurs. This paper also examines the inflation issue faced by United States and accommodating policy which has been used in order to achieve high employment target. Contractually, expectation is an important element in the anti-inflation policy to minimize the cost and output loss due to unemployment. Thus, a non-accommodating policy may be optimal to prevent the sustained inflation. The structure of this working paper began with executive summary followed by the assumptions of the paper and key concepts as well as the empirical evidence provided by the author. The author also provides some suggestions on how the monetary policy can be conducted to deal with the inflation process. Background/Assumptions of the paper Frederic S. Mishkin, the author of the working paper of ‘The Causes of Inflation’ is currently teaching at the Columbia Business School since 1983. This working paper was published in September, 1984 in National Bureau of Economic Research. He is also...
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...Is the monetary policy conducted by the American Federal Reserve really efficient? Does monetary policy conducted by the American Federal Reserve is really efficient? Introduction Miller et. Al.2013: Ch. 6: the chapter of this book is a set of articles that all point fingers at monetary policy’s weaknesses and interrogate Fed’s actions’ efficiency. All of them have pretty much a Keynesian point of view about the Fed’s policies failure, so they do not call into questions the existence of the Fed itself and its monetary policy but they rather globally accuse a lack of regulation and claim for an even more important intervention from the government. But over the last decades, we have experienced several Fed’s interventions and many expansionary monetary policies in order to try to counter the negative effects of the crises and then, to get the Economy back on track. However, the recovery is quite slow, the unemployment rate still quite high and a new crisis regularly burst. Thus, it seems legitimate to wonder about the effectiveness of the Fed policy. Does it have a real impact? And more important, does it have a real positive impact? First, we’ll define the monetary policy, its tools and its goals. Then, we’ll study the Keynesian theory of money and the important role it can play in the Economy and in its recovery - or could, without “interferences” strong Liberal thoughts might cause. Finally, we’ll consider arguments that claim monetary policy has become inefficient...
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...with his ideas of intervention in markets. The idea is also generally; that in the short run productive activity is very much influenced by aggregate demand, (aggregate demand is the total spending in the economy with the equation; Consumption + Investment + Government Expenditure + (Exports - Imports)) and that aggregate demand does not equal the productive capacity of the economy. Keynes believed strongly that Government Intervention would strongly help the economy to succeed and grow. His three main argument points concerning the Government were : The Government has a role to play in moderating the business cycle. Government can use short term monetary policy to engineer the economy. During economic hardship the government should spend to try and 'spur' on economic growth. In the second point I mentioned monetary policy, but what is it? It involves changes in the base rate of interest to influence the growth of aggregate demand, the money supply and price inflation. A short goal would be set for the economy to achieve this by changing the base rate. If the economy is doing well, the government should stop spending money, or spend less, but if the economy is bombing, the government should spend and help economy out. Keynes also had another theory that the if the government borrowed money to create jobs, people would spend more, consumer confidence would rise and the economy would recover. He also said that the extra spending would pay for itself if you picked...
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...prices in the economic market. An item’s value is determined based on production output, technology and wages paid to produce the item. Keynesian economic theory relies on spending and aggregate demand to define the economic marketplace. Keynesian economists believe the aggregate demand is often influenced by public and private decisions. Public decisions represent government agencies and municipalities. Private decisions include individuals and businesses in the economic marketplace. Keynesian economic theory relies heavily on the fact that a nation’s monetary policy can affect a company’s economy. Government Spending Government spending is not a major force in a classical economic theory. Classical economists believe that consumer spending and business investment represents the more important parts of a nation’s economic growth. Too much government spending takes away valuable economic resources needed by individuals and businesses. To classical economists, government spending and involvement can retard a nation’s economic growth by increasing the public sector and decreasing the private sector. Keynesian economics relies on government spending to jumpstart a nation’s economic growth during sluggish economic downturns. Similar to classical economists, Keynesians believe the nation’s economy is made up of consumer spending,...
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...about discrepancy between tight and monetary policy of United States’ Federal Reserve Bank compared to that of other countries. This article is related to Macroeconomics and concepts are consistent with the course materials. It talks about unemployment, inflation and monetary policy. I found out strengths and weaknesses from the monetary policy that occurred in this article. Different countries concern about different problems within their society whether it is inflation rate or unemployment rate. Emerging markets like China and dominant markets like Japan and Europe conduct tight monetary policy to raise interest rate. In contrast, the Fed (The Federal Reserve Bank) does not conduct tight monetary policy to raise interest rate. The author of this article states that the U.S. acts like an outlier. Some officials like the Hawks, people who pursue an aggressive policy, would like to see the Fed to tighten monetary policy. On the other hand, the Fed has conventional Keynesian perspective over the monetary policy. They are optimistic about inflation but aware of unemployment. So, there is a conflicting argument between the hawks and the Fed leaders. Ben Bernanke, chairman of the Fed, considers inflation’s principal determinants to be gap between aggregate demand and aggregate supply. In contrary, the hawks put less emphasis on the gap between aggregate demand and supply to regulate the inflation rate and more weight on the position of monetary policy. Although, there are...
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...Keynesianism?: New Labour Macroeconomic Policy and the Political Economy of Coarse Tuning Ben Clift & Jim Tomlinson The article has been accepted for publication in the British Journal of Political Science © Cambridge University Press, 2006. Forthcoming, Volume 36 (2006). Material on these pages is copyright Cambridge University Press or reproduced with permission from other copyright owners. It may be downloaded and printed for personal reference, but not otherwise copied, altered in any way or transmitted to others (unless explicitly stated otherwise) without the written permission of Cambridge University Press. Hypertext links to other Web locations are for the convenience of users and do not constitute any endorsement or authorisation by Cambridge University Press. Ben Clift, University of Warwick b.m.clift@warwick.ac.uk http://www2.warwick.ac.uk/fac/soc/pais/staff/clift Jim Tomlinson, University of Dundee j.d.Tomlinson@dundee.ac.uk Abstract This article questions prevailing interpretations of New Labour’s political economy. New Labour’s doctrinal statements are analysed to establish to what extent these doctrinal positions involve a repudiation of Keynesianism. Although New Labour has explicitly renounced the ‘fine tuning’ often (somewhat problematically) associated with post-war Keynesian political economy, we argue that they have carved out policy space in which to engage in macroeconomic ‘coarse tuning’ inspired by Keynesian thinking. This capacity to ‘coarse...
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...FI 363 Financial Institutions and Market Core Assessment Discuss the money supply response to changes in key variables including the reserve ratio, the non-borrowed monetary base, the discount rate, the currency ratio, the deposit outflows and market interest rates. In financial markets, the money supply can and does respond to different factors and events that can change how the money supply is handled, addressed and issued. The reserve ratio, or the cash reserve ratio, is a regulation that sets the minimum reserves each bank must hold against deposits and notes. The more deposits the bank has, the more of a ratio it might need to hold against its deposits. The non-borrowed monetary base which can deal with the federal reserve holdings of both currency in circulation and reserves as well as the treasury’s holdings can affect the money supply as this is the where the money comes from and depending on the policies the federal reserve wants to maintain, can adjust the monetary base and make changes to affect the market supply of money. With that change, the Federal Reserve can affect monetary policy and then turn around and make loans to banks. The loans made to the banks come with a small bit of interest called the discount rate, the amount the Federal Reserve charges the banks for use of the issued money. Depending on the rate, banks can set their interest rates, which would affect how many people would qualify for lending. The currency reserve ratio is how international...
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...growth theory and the symbiotic relationships between growth and investment, and people and infrastructure”. (Brown) As we have seen here in the past few years, but more so in the last year, the economy is ever changing. Macroeconomics is the backbone of America and without a stable economy we have serious hurdles in front of us to overcome. John Maynard Keynes developed the Keynesian Theory, which has become the foundation of our government’s economic decisions. During the course of this paper I will outline Keynesian Theorists and Monetary Theorists approach to promote long-run macroeconomic stability, the impact of persistent budget deficits on the trade deficit, options available to policy makers when national savings presents opportunity to improve the trade deficit, appraise the position of the supply side as it relates to government deficits and evaluate recent national economic policies as they relate to the magnitude of the trade deficit. In essence, the inner workings and use of macroeconomics as a financial tool of study to determine how a national economy is managed and sustained. To begin, Keynesian theorists approach to promote long-run macroeconomic stability is somewhat unique. Economist who agree with Keynes’ theories believe that we live in the short run, that what occurs in the short run does not mean it will occur in the long run. Keynes’ stated, “In the long run, we are all dead”. Obviously, spending, whether public or government, plus investments would change...
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