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PROBLEMS IN THE LONG-RUN

 

-Budget deficit

-Financial crowding-out (!gov. borrowing;|private bor.)

- Target dilemma (impossibility to stab. Ms, r at the same time)

E.g.: !Ms (in recession)=>!I,C=>!L=>!r to prev. level (graph: sdvig Ms,L vlevo)

-Unpredictability of MP result

Reasons:

--it is impossible !banks credit ability, it is impossible to make people lend from bank system=> Y-unchanged

--MP can influence velocity of money speculation (!MV|=PQ)

--link between r and investment may be weak=> no changes in Y

 

PROBLEMS CONNECTED WITH AVAILABILITY OF CREDIT CONDITION CONTROL

Side-effects:

-Decrease in banks’ competitiveness

-Discourage of small business (banks restrict credit for sm.bus)

-Decrease in consumer dem.=>banks restrict consumer credit=> consumer spending|=>|AD

 

KEYNESIAN AND MONETORY ATTITUDE TO MP

Keynesian:

-MP is less effective as FP because:

--difficult to control Ms

--Link between Ms and Y is weak, unpredictable

-Prime policy-FP

Monetarists:

-MP is better to decrease infl. than FP, as:

--MP maintains competition and doesn’t contradict with market principles

--MP exclude direct gov. intervention

-MP may be effective to fight infl. only in short-run

-Prime policy-market oriented supply side policy. Indirect infl. AS

 

STRENGHT OF MP

-MP can be changed more quickly than FP.

-More isolated from gov. preasure

WEAKNESSES OF MP

-MP is less effective in decreasing recession

-MP is highly controversial, its result unpredictable

 

POLICIES AND CONTROVERSIES IN MACROEC. POLICY.

ISLM model- model which combines goods and M. markets.

 

IS curve- shows all the various combinations of r and Y at which equilibrium in goods market exist (includes all points when I=S=> called ‘IS curve’)

ELASTICITY of IS curve depends on

-responsiveness of I,S to r changes (! S respond=>!effect on Y=>more elastic)

-size of multipl. and mps

k=1/mps (!k,|mps=>flatter S curve=> bigger effect on Y=> more elastic)

SHIFTS of IS curve depend on changes in I,S independently from changes in r.

(Independent fall in I leads to shift IS curve to the left, fall in S=>shift IS to right)

 

LM curve- shows all the combination of r, Y at which equilibrium at M. market exists

ELASTICITY of LM curve depends on:

-responsiveness of L to changes in Y (!L response, !effect on r=>|elasticity)

- responsiveness of L to changes in r (!L response, the flatter liquidity pref. curve (more elastic)=>more elastic LM curve

shift of L curve depend on changes in L, Ms independently to changes in Y. (independent fall in L (due to decrease in speculation)=> shift to the left; !Ms (incr. in M. issue)=>shift to the right

 

EQAUALIBRIUM IN ISLM MODEL

Ye-point of equilibrium in both markets (goods,money)

Assume Ye>Y1=>R1=> |I,!S=>|Y(Y2)=>|L(movement along LM curve)=> r|=>!I,|S=>!Y



 

EFFECTS ON FP and MP (Keyn. and Mon. pos)

Basic assumption:

K: -LM-relatively elastic (as L elastic)

-IS-relatively inelastic (I-inelastic)

M: -LM-inelastic

-IS-elastic

Effect of expansionary FP (!G,|I)

K: FP is effective to encourage AD

M: FP is ineffective as small increase in Y

Effect of expansionary MP (!Ms)

K: final increase in Ys is small=>ineffective

M: effective, !AD=>!P (Y-unchanged)

 

Both expansionary FP,MP-ineffective, but only tight MP may be effective in the short-run

2 questions arise:

-is it possible to find compromise between FP and MP?

K: yes, FP,MP will be most effective when applied simultaneously. (!Y, but not !r)

-Is it possible to apply these policies simultaneously?

K: yes, !G=>!AD=> automatic ! in AS due to money mult. effect.

 

PHILIP’S CURVE

Attempts to fight infl. took to recession and unempl. This dilemma is illustrated with Philip’s curve

It says that it is impossible to reach simultaneously |P and !Y

Original PC is between weight inflation and wage, but later for price infl. U infl.

 

 

KINKED PC

..model reflected relation between dem.-pull infl. and disequal. U.

P=a+b*(1/U)

a,b- const

1 part- inelastic, shows situation when AD>AS=>!AD exceeds AS=>more rapid !P

Un-natural rate of U (AS=AD)

No dem.-pull infl.

2 part- elastic, means AD<AS=> U! more rapidly than |P

 

NATURAL RATE HYPOTHESIS (NRH)- series based on incorp. of expectations in the theory of unempl.

MONETORISTS CONTRIBUTION TO NRH

The basic hyp.- adaptive expectation serie

MODIFICATIONS OF PC:

-In the short-run positions of PC depend on expected rate of infl.

P=f(1/U)+(expected rate of infl)

-In the long-run PC is vertical and intersects Un (constant rate of U takes place due to accumulation, there is no accelerating infl. rate of U)

POLICY IMPLEFECATION OF THIS THEORY

-if G. wants to eliminate infl., it should keep U above Un

-The best way to cut U- supply-side policy.

NEW CLASSICAL CONTRIBUTION

Rational expectation serie- people base their expectations on the current information and person evaluation of gov. policy and promises.

MODIFICATIONS OF PC:

Both in short-run and long-run PC is vertical

P=f(1/U)+Pe

Pe-people expectation, when people correctly determine rate of infl. and don’t expect changes in Y

On average people predict infl. correctly.

POLICY IMPLEFECATION BASED ON THIS SERIE

-AD management is not useful, moreover it is nonsense. Only result of this-infl.

-Elimination of infl. is possible, effective if G. use non-dem. MP in the short-run

MODERN KEYNESSIAN CONTRIBUTION

Basic hyp: both adaptive and expect. take place, but they concern not only price decisions, but also output U. decisions

MODIFICATIONS OF PC:

In the long-run PC is more elastic than in the short-run but not vertical

-!AD=>infl.

-expect. boom=> reduction in U

AD reduction-ineffective policy

Negative effect on U

 

EXPLANATION OF STAGFLATION (!U,!P)

1) MONETARISTS EXPLANATION

… is based on clockwise Phil. Loops model

assume G. wants |Un=>try to reduce to ‘B’=> econ. moves from ‘B’ to ‘C’ (accelerating infl.)=>in ‘C’ G. worries about high level of infl.=>|infl. allows !U

C->D->E-called stagflation(!U,!P simult.)

In order to overcome stagflation G. should allow !U further

2) MODERN KEYNESSIAN EXPL.

Rightward shift in PC model due to !monopoly power and grows in the equalibr. U at the same time.

a) initial point. If there is cost-push preasure connected with monopoly power of firms and trade unions=>!P

b) !Ue due to !compet. from abroad., etc=> PC to the right

To overcome stagflation: it is necessary to shift curve back to initial point

To do it:

1) possible use price and income pol.(to |P and |wages) simult.)=>it may prevent infl.

2) improvement of information in labour market in order to decrease equal.

3) Training of labour policy (esp. in high-tech progress)

4) Procompetitions policy (antimonopoly and antiunion policy) to |cost-push infl)

5) supply-side policy (to stimulate AS in economy)


Date: 2015-12-11; view: 713


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