Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Steady-state economy wikipedia , lookup
Business cycle wikipedia , lookup
Chinese economic reform wikipedia , lookup
Ragnar Nurkse's balanced growth theory wikipedia , lookup
Pensions crisis wikipedia , lookup
Modern Monetary Theory wikipedia , lookup
Economy of Italy under fascism wikipedia , lookup
Non-monetary economy wikipedia , lookup
Transformation in economics wikipedia , lookup
Monetarism / Keynes Monetarist View Keynesian View Inflation – caused by excessive growth in the money supply. Monetary policy must therefore act to restrict the growth of the money supply. Fiscal policy must work to produce a low Public Sector Borrowing Requirement so that the government does not have to print the money it needs to cover spending. Inflation – is caused by cost-push factors, can be controlled by prices and incomes policies. If inflation is demand-pull in nature then the government will have to accept higher unemployment if it wishes to lower inflation by reducing public spending and/or increasing taxes. Unemployment – is caused by a lack of competitiveness in the economy as a whole, and by failures in the market for labour in particular. Monetarists argue, therefore, that tax rates should be reduced in order to increase incentives to work. Workers should accept lower wage rates to prevent themselves being priced out of jobs. Generous welfare payments to the unemployed should be cut to encourage people to take jobs. Trade unions should lose their power to fix wages which are too high. Unemployment - caused mainly by a lack of demand in the economy. Governments need to increase demand by increasing the Budget Deficit, the Public Sector Borrowing Requirement. However, many Keynesians believe that much of the unemployment in Britain in the 1980s/1990s was structural. Here they would agree with monetarists that supply-side measures such as extra investment are essential. Growth – will be increased if the UK becomes more competitive. Cutting tax rates, privatisation, reducing union power, cutting welfare benefits, helping small businesses – all these measures will help growth. Growth – can be stimulated by keeping a high level of demand in the economy. This will encourage firms to invest, because firms know they will be able to sell their products. The Current Account – will look after itself as long as the government does not attempt to fix an artificial rate of the pound. The Current Account – can be kept in balance through use of import controls or by devaluing the pound. Keynesians disagree amongst themselves as to how effective each policy could be, or whether such policies would be effective at all. Overall – monetarists believe that the government’s role is to control the money supply and to help freemarket forces work. The government has only a limited role and cannot directly control either unemployment or the growth rate. Overall – Keynesians argue that the government can have a powerful effect on the economy and believe that free-market forces can reduce the economy to ruins if left to themselves. Accordingly, governments have to correct freemarket forces to ensure that the economy is running at full employment. Monetarism / Keynes Fiscal Policy By adopting various policy measures governments can affect the economy. The main weapon is fiscal policy – a government policy with regard to government spending, taxation and borrowing. Fiscal policy can affect the economy in a number of ways. First it may affect the level of demand in the economy. If a government spends more and/or raises les money in taxation there will have to be an increase in the amount that the government borrows – the Public Sector Borrowing Requirement (PSBR) or PSBR will go up. An increase in PSBR will mean that the private sector will have more money to spend. This will come about either because the private sector is paying less in taxes than before or it will have money as a result of extra government spending. For example, if the government has spent more on roads, then the private sector will end up with that extra money in the form of wages, orders for raw materials etc. Economists disagree, however, about the exact link between PSBR and aggregate demand. Keynesian economists argue that an extra £1 of government borrowing will increase national income by more than £1. This is known as the Multiplier Effect. The argument is that if the government increases, say, spending in hospitals by £1, then it will lead to an increase in income. But whoever receives that £1 (workers, firms etc) will spend it, creating further income in the economy. The money will keep travelling round the economy, each time, creating extra income as it goes. Monetarists, however, argue that there is no multiplier effect. In fact £1 of extra borrowing by the government will mean that the private sector will not be able to borrow that £1 extra public spending crowds out private spending, so that an increase in the PSBR has no overall effect on aggregate demand in the economy. Second, fiscal policy can affect the distribution of income and wealth in the economy. By making the rich pay more taxes than the poor, and by increasing spending on programmes that benefit the poor rather than the rich, the government can make the distribution of income and wealth more equitable. Making the poor pay more in taxes and reducing spending programmes designed to help the poor will increase the income and wealth inequalities in the economy. Thirdly, fiscal policy can affect the decisions of industrial consumers, workers and firms. Of a government gives cash grants or reduces taxes to firms making investment, then total investment in the economy should rise Workers may work harder, if incentives to work are increased. This can be done by reducing the marginal rate of income tax (the rate of tax on the last pound earned by the worker). Or it can be done by reducing unemployment benefits so that the difference between income in work and out of work is increased Monetarism / Keynes Entrepreneurs can be encouraged to start up in business and expand through a whole variety of measures – e.g. reduced marginal tax rates on income and profits, investment grants and tax privileges on borrowed funds Firms can be encouraged to take on more workers through reducing taxes on the emp0loyment of workers – the main tax in the UK being employers’ national insurance contributions Key Terms: Fiscal Policy – government policy with regard to public expenditure, taxation and borrowing. Public Sector Borrowing Requirement – the difference between the total government revenue and total government spending. Multiplier Effect – the theory that extra spending will lead to further increases in spending in the rest of the economy. Crowding Out – the theory that extra government spending leads to less spending by the private sector.