The business cycle and government

INTERVENTION

 

Lead-in: Do you know the difference between these theories? Key words and phrases 1. full employment –повна зайнятість 2. excess savings –підвищені заощадження 3. interest rates– процентна ставка, норма відсотку 4. to increase taxation –збільшувати оподаткування 5. boom and recession– бум та спад, зниження 6. to increase expenditure –збільшувати витрати 7. money supply –грошова маса 8. output and consumption –випуск продукції та споживання, витрачання 9. multiplier effect –ефект мультиплікатора 10. fiscal policy –фіскальна політика 11. long-run effect– довгочасний ефект 12. flexible wages –гнучка заробітна плата 13. excess supply (demand) –надмірна пропозиція (попит) 14. expansionary policy –політика розширення 15. deflationary policy –політика дефляції

The great depression of the 1930s demonstrated that the market system does not automatically lead to full employment. In The General Theory of Employment Interest and Money (1936), John Maynard Keynes argued that market forces could produce the equilibrium with high unemployment of indefinite duration. Classical economic theories Nationald that in the long run, excess savings would cause interest rates to fall and investment to increase again. Keynes disagreed, arguing that market economies are unstable.

Keynes recommended governmental intervention in the economy. During an inflationary boom, governments could decrease their spending or increase taxation. During a recession, on the contrary, they could increase their expenditure, or decrease taxation or increase money supply and reduce interest rates, so as to stimulate the economy, and increase output, investment, consumption and employment. Keynes also argued that even a small amount of additional government spending or an increase in private investment causes output to expand because of the multiplier effect.

In the 1950s and 1960s Milton Friedman began to argue that Keynesian fiscal policy had negative long-run effects. Unlike Keynesians, monetarists insisted that money is neutral, meaning changes in the money supply will only change the price level and have no effect on output and employment. They argued that governments should abandon any attempt to manage the level of demand in the economy through fiscal policy. On the contrary, they should try to make sure that there is constant and non-inflationary growth in the money supply.

Monetarists argue that recessions are not caused by long-run market failures but by short-run errors by firms and workers who do not reduce their price and wages quickly enough when demand falls. When economic agents recognize that prices and wages have to fall, the economy will come back to normal. Since the government will not be able to recognize a coming recession it will only be able to act at the same time as everyone else is recognizing the need to cut prices and wages. Consequently, its fiscal measures will take effect when the economy is already recovering.

Whereas classical and neo-classical economic theory assumes prices and wages to be flexible enough to eliminate excess supply or demand, Keynesians (today often called neo-Keynesians) argue that wages are inflexible because of labour union contracts, government regulation and so on. Furthermore, businesses can’t change their prices too frequently, because they do not have perfect information, and because there are many costs involved. Neo-Keynesians still maintain that because individuals and firms are unable to find the right prices that would lead the economy to rising output and high or full employment, economies can get locked into disequilibriums for long periods. Thus unlike the monetarists, w`ho insist that free markets and competition are efficient and should be allowed to operate with a minimum of governmental intervention, Keynesians believe there is still a role for either expansionary or deflationary policies.

 

Ø Comprehension:

1. What did classical economic theories National?

2. What did Keynes recommend?

3. What did monetarists insist on?

4. Do classical and neo-classical theories assume prices to be flexible?

5. Do Keynesians hold the same opinion?

 

Ø Summarizing:

Complete the following sentences to summarize the text above:

1. In his book John Keynes argued that ….

2. Classical economic theories Nationald that ….

3. Keynes recommended … in the economy.

4. Milton Friedman argued that Keynesian fiscal policy had ….

5. Monetarists insist that free markets are efficient and should be allowed to ….

6. Keynesians believe there is still a role ….

 

Ø True-false questions:

1. The great depression of the 1930s demonstrated that the market system does not automatically lead to full employment.	
2. Classical economic theories Nationald that excess savings would cause interest rates to fall and investment to increase again.	
3. Keynes did not recommend governmental intervention in the economy.	
4. In the 1950s and 1960s Milton Friedman said that Keynesian fiscal policy had negative long-run effects.	
5. Monetarists insist that free markets and competition are efficient and should be allowed to operate with a minimum of governmental intervention.	
6. Keynesians believe there is still a role for either expansionary or deflationary policies.	

Ø Viewpoint:

In your opinion, should the government intervene to create jobs in case of high unemployment?

 

 

MACROECONOMICS

 

Lead-in: What is the difference between macroeconomics and microeconomics? Key words and phrases 1. performance of the economy –стан економіки 2. to allocate scarce resources –розміщувати недостатні ресурси 3. household –домашнє господарство 4. labour and capital –праця та капітал 5. aggregate output –сукупний обсяг виробництва 6. consumption and investment –споживання та інвестування 7. total expenditure –сукупні витрати 8. National intervention –державна інтервенція 9. rate of inflation –інфляційний темп, рівень інфляції 10. labour market –ринок праці 11. balance-of-payments equilibrium–рівновага платіжного балансу

Each microeconomic unit functions within the context of an entire economy and is closely affected by the performance of that economy.

The distinction between macro – (from the Greek word ‘makros’ meaning ‘large) and microeconomics is a somewhat arbitrary one but it serves to emphasize the differing preoccupations and approaches of the two branches. In microeconomics we approach the problem of allocating scarce resources with a theory of price determination based upon the interaction of supply and demand. In macroeconomics we employ the theory of the circular flow of income in order to analyze the overall behaviour of the economy.

The circular flow of income pictures an economy as a closed system with income flowing between the two basic spending units – households and firms. Households pay money to firms in return for goods and services produced by the firms, and firms close the circuit by paying money to households in return for the use of factors of production – land, labour and capital – owned by the households. This is obviously a gross oversimplification of what actually occurs.

In macroeconomics we are concerned with aggregate levels of output, income, employment and prices, and with their fluctuations. We shall consider how these aggregates are influenced by foreign trade, and how they are influenced by the way the resources of an economy are distributed between consumption and investment. We shall also have to consider the role of government in determining the flow of income because governments command a large proportion of total expenditure and investment in modern economies. And the inclusion of government in our model illustrates another distinction between micro- and macroeconomics. In microeconomics the emphasis is on the working or market forces mediated by the government. On the other hand, macroeconomics is predominantly policy-oriented. It is about government intervention.

National intervention is now an accepted fact in broad areas of economic life. It is a relatively recent phenomenon, which owes its development to the inter-war depression (1921-39). During that period of industrial slump, when the UK unemployment rate averaged 14%, considerable doubts arose about the ability of an unregulated economy to achieve full employment.

The 1960s saw the development of what has become known as monetarism, associated primarily with Professor Milton Friedman at the University of Chicago. Monetarism has its roots in the economic theory attacked by Keynes and suggests that altering the level of demand in the economy affects only the rate of inflation and not output and employment. Monetarism became increasingly influential in economic policy during the 1970s and 1980s.

Governments now intervene in all economic sectors – in agriculture, in industry, in the labour market, in trade. They control monopolies in order to ensure free competition; they are responsible for defence and law and order; they supply the economic infrastructure of transport systems, energy, posts and telecommunications; and they provide a wide range of social services and facilities. The dissatisfaction with the role of government at the macroeconomic level was matched in many countries in the 1980s with a greater emphasis on the operation of markets free of unnecessary government intervention.

Governments have four basic economic objectives: full employment, price stability, balance-of-payments equilibrium, and economic growth. These objectives are just as applicable to governments of developing countries as to those of developed countries, though the latter have minuscule problems to solve in comparison to the problems facing developing countries.

Ø Comprehension:

1. What is the difference between macroeconomics and microeconomics?

2. Where is the emphasis in microeconomics?

3. Why is National intervention an accepted fact now?

4. When did monetarism come into being?

5. In what economic sectors do governments now intervene?

6. How many basic economic objectives do governments pursue?

7. Are these objectives applicable only in developed countries?

 

Ø Summarizing:

Complete the following sentences to summarize the text above:

1. In microeconomics we study the problem of…

2. In macroeconomics we analyze the overall…

3. National intervention in economic sectors began…

4. Governments have now four basic economic objectives:…

Ø Text organization:

The Nationalments below express the main ideas of the text. Number them so that they are in the same order as the ideas in the text. The first one is given for you:

	Nationalment	Order
a.	Governments have four basic economic objectives: full employment, price stability, balance-of-payments equilibrium, and economic growth
b.	In macroeconomics we employ the theory of the circular flow of income in order to analyze the overall behaviour of the economy.
c.	In microeconomics we approach the problem of allocating scarce resources with a theory of price determination based upon the interaction of supply and demand.
d.	Each microeconomic unit functions within the context of an entire economy.
e.	National intervention owes its development to the inter-war depression (1921-39).
f.	Governments now intervene in all economic sectors.

Ø Viewpoint:

In your opinion, why is it important to study macroeconomics?

MONEY

 

Lead-in: How many functions of money can you mention? Key words and phrases 1. advanced economy –передова, прогресивна економіка 2. supply of money –грошова маса 3. bank account –банківський рахунок 4. notes and coins –банкноти та монети 5. disruptive effect –руйнівний ефект 6. medium of exchange –засіб обміну 7. unit of account –розрахункова грошова одиниця 8. store of value –засіб збереження 9. purchasing power –купівельна спроможність 10. real assets –нерухоме майно, нерухомість 11. building societies –житлово-будівельні товариства 12. property –власність, майно 13. to carry out transactions –здійснювати операції, справи 14. deferred payment –майбутні сплачування