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History of Economy
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Monetarism is very related to the classical school. Actually it expended classical theory to explain new phenomenom-stagflation which is connection of stagnation and inflation. This term appeared first time in 1970s and Keynesians had no solution for it at the time. Monetarists argued that increases in money supply would cause inflation therefore they believed that the money supply should be controlled.
One of the best known Friedman´s quaotes:
"Inflation is always and everywhere monetary phenomenom."
The two key areas of Monetarists´work are:
Quantity Theory of Money
Fischer Equation of Exchange:
M.....amount of money in circulation
V.... velocity of circulation of money
P.....average price level
T.... number of transactions taking place
Increases in money supply would lead to inflation-control the money supply to control the inflation.
Expectations-augmented Phillips Curve
Phillips Curve was created by Keynesians and it showed a trade off between
unemployment and inflation. But the problem was that in 1970s it could not explain the
stagflation-unemployment and inflation going up together. According to the curve it was
not possible but it happened. Friedman came up with theory about expectations. He
argued that there were more curves for different each level of expected inflation
Major economic approaches of today
Today, there are two different ways of organizing economy. At one extreme, most economic decisions are made by governor. At the other extreme, decisions are made in markets by individuals through payments of money.
In the USA and most democratic cultures. Most economic problems are solved by the market – it’s called MARKET ECONOMY (capitalism). The major decisions of production and consumption are made by individuals and private firms. Firms produce the commodities which yield the highest profits by the cheapest technology. Consumption depends on the individuals’ decisions how to spend their wages. The role of government is just to guard against shady and dishonest dealings. The characteristic of capitalism can be divided into two major categories:
1. Private ownership of capital – under capitalism somebody owns each piece of capital and perceives the income from it