This theory was unpopular with most Keynesian because of their belief that velocity was unstable and the economy would not return to potential output without help. However, the Monetarism theory relies on the ability to predict the velocity rather than stabilize it. Because Monetarists believed the economy was stable, they viewed the Aggregate supply curve as a steep slope. Another idea Monetarists believed was that the Fed should have a strict set of rules, which they should tie in monetary policies, including one of the most popular: the Money Growth Rule. The Money Growth Rule stated “The Feds should be required to target the growth rate of money so it equals the growth rate of real GDP.” However, Monetarists saw fiscal policy as useless, and believed government should not intervene, because the only thing that comes out of government intervention is interference with the free market.
Accordingly, states should never interfere in the market. Prices are flexible, which provides the full employment balance. Increasing wages will lead demand for labor to fall, the falling demands will cause wages to decrease again and it will cause increasing demand for labor and employment automatically. Selfish behaviors of the actors in the market will provide benefit to all people in the market. Classical theory had firstly faced with a crisis that stated in 1870’s then it managed to survive by transforming to neoclassical theory.
Numerous economists question the classical form of monetarism and instead give an alternative to what they presume would serve countries well. Keynesianism Keynesianism theory of economy, on the other hand, emphasizes that fiscal policy can play a significant role in stabilizing the economy (Kindleberger, 2013:14). Unlike in monetarism, Keynesianism advocates for higher government spending; especially during a recession, as this can help recover the economy quicker. Keynesians argue that it is ill advised for governments to wait for markets to clear, as classical economic theory suggests. Principles of Keynesianism and its Links to the
The first and foremost aim of the Central Bank is to maintain the inflation level to the minimum. The Quantitative Easing policy is differing and very inflationary since it uses money for both lending and keeping as reserves. Nevertheless the economic policy on the other hand states that the effect of inflation will be good when Quantitative Easing is used, when the economy goes down as it will encourage the economy as a whole initially. But it will create problems in the longer run as the effects of such a simulation will be an extreme challenge to deal with when the economy gradually recovers. Secondly, quantitative easing can lead to a fall in the interest rates in the short term and an increase in the rate of inflation in the longer run, hence causing an instability in the financial system as well as an increase in the interest rates, therefore it is essential for the central banks to keep the interest rates
b) Slow Industrial Growth Due to use of backward techniques of production our industrial sector is not at developing form. Its fewer production also creates shortage in market and caused of inflation. c) Increase in Wages & Salaries Present era labours are demanding high wages and salaries. Increment in wages and salaries it might be leads to increase in cost that increases the prices. On the other way due to high wages and salaries there is an increment in income and it reason in inflation.
So if AD rises enormously, price level will also probably rise enormously which will cause high inflation. Expansionary fiscal policy will reduce unemployment in a short run, but when the country starts grow there will be higher demand for educated workers, which can be educated only if government spends even more, which might be just too much for the government to handle. When Philippines government start to borrow more demand for borrowing will rise and cause interest rates to increase also. Taking in consideration all advantages and disadvantages of implementing expansionary fiscal policy in Philippines in my opinion Philippines should implement it because it will decrease their unemployment and increase standard of living. Philippines government should be careful not to over spend and not to cause
Revenue growth comes from an emphasis on sales and marketing activities, and is solely concerned with increasing top-line earnings — earnings before expenses.” • Profit Margins “Profit objectives are a bit more sophisticated than revenue growth goals. Profit goals are concerned first with revenue, then with costs.” •
History has shown that too much tightening of monetary policy to solve cost-push inflation will lead the economy to a recession. The central bank should tread carefully on how high to take interest rate. Increment in interest rate will lead to high cost of borrowing; thus, it will ultimately slow down the economic growth (Taing, 2014). This can also be linked to the theory that is covered in the unit plan. During the cost-push inflation, the government intervention by using contractionary monetary or fiscal policy will shift the aggregate demand curve to the right, thus, the price level decrease but the output level will decrease
The Malaysian government influences the economy by adjusting the amount of taxes, transfer payments and purchasing in transfer policy. It is known that when the tax is cut, it will directly arise the amount of disposable income. When the income increases, directly it will increase the amount of aggregate demand that will influence to increase in real GDP. If the firms produce more goods and services because of the increase
Rapid Economic Growth: It is the most important objective of a monetary policy. The monetary policy can influence economic growth by controlling real interest rate and its resultant impact on the investment. If the RBI opts for a cheap or easy credit policy by reducing interest rates, the investment level in the economy can be encouraged. This increased investment can speed up economic growth. Faster economic growth is possible if the monetary policy succeeds in maintaining income and price stability.