In the 1950s and 1960s, monetarists, most notably Milton Friedman, began to argue that Keynesian fiscal policy has negative long-run effects. Unlike Keynesians, monetarists insisted that money is neutral, meaning that in the long run, 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 prices 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 any more quickly than the companies that make up the economy, 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, and so will make the next swing in the business cycle even greater.
Ex. 1 Find pairs of synonyms in A and B.
A: argue, consequently, circumstances, fewer, abandon, recognize;
B: give up, identify, as a result, situation, insist, less.
Ex. 2 Find pairs of antonyms in A and B.
A: indefinite, lose, employed, constant, growth, quick, right; believe;
B: temporary, wrong, drop, question, slow, limited, jobless, find.
Ex. 3Answer the following questions.
1 What might provoke a high-unemployment equilibrium, according to Keynes?
2 What will happen if people save a lot of money, according to classical theory?
3 What is the economic effect of even a small increase in government spending, according to Keynes?
4 What do monetarists mean by 'the neutrality of money'?
5 How do monetarists explain causes of recessions?
6 What is the monetarist objection to government intervention?
Ex. 5 Summarize the content of the text.
Ex. 6 Split into 2 groups - Keynesians and Monetarists - and try to
present the optimal government policy.