Миловидов В.А. Английский разговорный язык. Практическое пособие по развитию устной речи
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3. Why is it possible to live in a more expensive house in the times of inflation?
Monetary Policy
Monetary policy is the most important instrument of government policies. It is carried out by the
central bank whose actions are affecting economic activity.
Monetary policies are on the demand side of macroeconomics. They stimulate or discourage
spending on goods and services. Monetary policy is used to damp, perhaps even eliminate,
fluctuations in aggregate demand. It is not a supply-side instrument. Central banks have no
tools to affect productivity and real economic growth.
If a central bank is carrying out expansionary monetary policy, the aggregate spending
(purchase of goods and services by consumers, businesses, and governments) increases. In its
turn, these new demands raise output and employment, as well as prices. They also speed up
inflation.
A central bank is usually called a «bankers' bank», whose customers are not ordinary citizens
but commercial banks, savings banks, savings and loan associations, and credit unions. They
hold deposits in and borrow from the central bank and are supposed to follow the central bank's
reserve requirements and other regulations.
Banks are to hold reserves equal to prescribed percentages of their deposits. These reserves
are regularly tested, reserve tests being the main tool of monetary policy. In order to pass the
reserve tests commercial banks need the central bank's funds, and so, the latter controls the
supply. To acquire reserve balances banks sell their securities to the central bank. In other
cases the central bank can extinguish reserve balances by selling its securities to commercial
banks. These open-market operations are the instrument of monetary policy. The central bank
open-market operations are interventions in this market.
Another tool of central bank policy is the setting of the discount rate. Money rates are costs of
funds that the banks can lend to their customers. When discount rates go up, commercial banks
have to raise their lending rates. The commercial banks' customers then borrow and spend less,
which affects business throughout the economy. So, controlling money markets and banks, the
central bank influences the whole financial system, this influence affecting the national economy
in general.
:
damp –
eliminate – ,
expansionary –
extinguish – ,
latter –
()
lend – ,
ordinary – ,
test – ;
demand side – (.: )
supply-side –
speed up – )
savings bank –
savings and loan association –
credit union –
hold deposits –
reserve requirements –
equal to prescribed deposits –
in other cases –
open-market –
interventions –
discount rate –
Exercise 4
Answer the questions:
1. What financial institution is monetary policy carried out by?
2. What side of macroeconomics (the demand or the supply side) are the monetary policies on?
3. What is the main objective of the monetary policy?
4. What happens in case a central bank carries expansionary monetary policy?
5. What financial institutions are a central bank's customers?
6. What is a reserve test?
7. What do commercial banks have to do in order to acquire reserve balances?
8. How can a central bank extinguish reserve balances?
9. What is a discount rate?
10. How does the setting of the discount rate affect the national economy?
What Is Keynesianism?
1
– Why is a physician held in much higher esteem than a Keynesian economist?
– A physician makes an analysis of a complex illness whereas a Keynesian economist makes
you ill with a complex analysis!
2
If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes,
in which case you get three opinions.
:
physician – ,
whereas –
esteem –
hold in much higher esteem –
make ill –
in which case –
Keynesian Economics
Keynesian economics is a theory of total spending in the economy (called aggregate demand)
and of its effects on output and inflation. The main points of the theory are as follows.
First, the Keynesians think that aggregate demand is affected by a great variety of public and
private economic decisions. Of the public decisions most important are monetary and fiscal
measures taken by the government and the central bank (i.e., spending and tax). Quite recently
Keynesians believed that monetary policy was powerless, and advocated fiscal measures as
the means to fine-tune the economy. Today the majority of both Keynesians and monetarists
believe that both fiscal and monetary policy affect aggregate demand.
Secondly, changes in aggregate demand have their greatest short-run impact not on prices, but
on real output and employment. The famous Phillips curves show that inflation changes only
slowly when unemployment changes. Monetary policy produces real effects on output and
employment only if some prices are stable and do not adjust instantly.
Thirdly, Keynesians suppose that prices and, especially, wages respond slowly to changes in
supply and demand, resulting in shortages and surpluses, especially of labour.
Contrary to monetarists's view Keynesians do not think that the typical level of unemployment is
ideal. With them unemployment is more of a problem than inflation. Keynesians also state that
macroeconomic fluctuations significantly reduce economic well-being, that recessions or
depression are economic maladies, not efficient market responses to unattractive opportunities,
as the monetarists suppose.
Hence Keynesians advocate activist stabilization policy to reduce the amplitude of the business
cycle, which they rank among the most important of all economic problems. So, Keynesians
developed the notion of a fiscal/monetary mix to control spending and the balance of payments
simultaneously. Well-timed changes in taxes and government spending were to be balanced to
control the economy. If this macro measures didn't work out as intended, the goverment should
administer price and wage controls. Keynesians identified themselves as engineers who adjust
the controls and, when necessary, design new controls to maintain just the right mix of policies.
In order to know how to develop policies, Keynesians worked out forecasting models with
hundreds of equations. These models are processed on powerful computers simulating possible
changes in economy affected by different policy actions.
Monetarists are critical of these models, and prefer stable policy rules that reduce variability and
uncertainty for private decision makers. They suppose that government should maintain the
long-run stability, and not interfere into economic life too often. Monetarists see such efforts as
frequently destabilizing.
:
activist – ;
adjust – ,
administer – , ,
advocate – ,
aggregate –
amplitude –
curve – ()
equation –
fiscal – ,
fluctuation –
forecast – ;
hence –
ideal –
impact – , ,
instantly –
interfere – ,
maintain –
malady – ,
opportunity – ,
process –
respond –
response –
shortage – , ()
simulate –
simultaneously –
state –
surplus –
typical –
unattractive –
variability – ,
Keynes John Maynard – ,
a great variety –
fine-tune – ()
majority –
short-run –
contrary to –
more of a problem than – () ,
well-being –
rank among –
fiscal/monetary mix –
well-timed –
as intended – ,
identify as – ()
critical of – ()
long-run –
Exercise 5
Answer the questions:
1. What theory has the Keynesians developed?
2. What is aggregate demand affected by, in Keynesians' opinion?
3. What are the most important public decisions affecting aggregate demand?
4. How has the Keynesians' attitude towards monetary measures changed recently?
5. What do changes in aggregate demand have the greatest short-time impact on?
6. What do Keynesians think about the typical level of unemployment?
7. What is their opinion on macroeconomic fluctuations?
8. What economic policies do Keynesians advocate?
9. Who do Keynesians identify themselves as?
10. What processes do forecasting models simulate?
Forecasting and Econometric Models
An econometric model is a tool that helps economists forecast future developments in the
economy. Econometricians study past relationships between variables such as consumer
spending and gross national product, and then try to forecast how changes in some variables
will affect the future course of others.
To make such calculations econometricians need an economic model, and a theory of how
different factors in the economy interact. For convenience, economists use mathematical
models, which are a set of equations that describe various relationships between variables.
These models are used to predict future trends in the economy, and are called econometric
models.
Actually, no econometric model is ever truly complete and absolutely reliable both as a whole
and in details. Some variables cannot be predicted because they are determined by forces
«outside» the model. For example, a reliable realistic model must include taxes collected by the
government because taxes make the gap between the gross income earned by households and
businesses and the net income (disposable income) available for spending. The taxes collected,
in their turn, depend on the tax rates in the income tax laws. If econometricians wish to forecast
economic activity several years into the future, they have to include the anticipated future tax
rates into their model's information base. So, they are supposed to make assumptions about
possible changes in future income tax rates, the monetary policy that will be carried out by the
central bank, and many other such «outside of the model» (or exogenous) variables in order to
forecast all the «inside of the model» (or endogenous) variables. Being incomplete, econometric
models sometimes are far from offering reliable predictions.
:
anticipate – ,
calculations –
complete – ,
course –
determine –
econometric –
econometrician –
econometrics –
endogenous – (, )
exogenous – ()
forecast – ;
gap – ,
include –
incomplete –
interact –
predict –
prediction –
reliable –
variable –
gross national product –
as a whole – ()
in details –
gross income –
net income –
several years into the future –
information base –
Exercise 6
Answer the questions:
1. What do econometricians study?
2. What economic variables do they take into account while producing their models?
3. What is an economic model?
4. Why cannot some economic variables be predicted?
5. What economic variables are called exogenous and endogenous?
How Does Forecasting Work?
1
An economic forecaster was known to have an horseshoe prominently displayed above the
doorframe of his office. Asked what it was for, he replied that it was a good luck charm that
helped his forecasts. But do you believe in that superstition? he was asked, and he said, «Of
course not!» But then why do you keep it? «Well,» he said, «it works whether you believe in it or
not.»
2
An econometrician and an astrologer are arguing about their subjects. The astrologer says,
«Astrology is more scientific. My predictions come out right half the time. Yours can't even reach
that proportion.» The econometrician replies, «That's because of external shocks. Stars don't
have those.»
3
An economist is a trained professional paid to guess wrong about the economy. An
econometrician is a trained professional paid to use computers to guess wrong about the
economy.
4
Economic statistics are like a bikini, what they reveal is important, what they conceal is vital.
5
Forecasting is like trying to drive a car blindfolded and following directions given by a person
who is looking out of the back window.
:
argue – ,
astrologer –
astrology –
bikini – ()
blindfolded –
charm – ,
doorframe –
external –
guess – ,
horseshoe –
luck – ,
prominently –
proportion –
shock – , ,
superstition –
vital –
good luck charm – ,
come out right – «», «»
guess wrong – ,
Exercise 7
Answer the questions:
1. What did the forecaster have the horseshoe displayed for?
2. How often are the astrologer's forecasts correct?
3. Why can't econometrics reach that proportion of correctness?
4. How do econometricians use computers in their guesswork about economy?
5. What do bikini… Well, I never…
How to Use Mathematics in Economics. The Equation of Earnings
Engineers and scientists will never make as much money as business executives. Now a
rigorous mathematical proof has been developed that explains why this is true:
Postulate 1: Knowledge is Power.
Postulate 2: Time is Money.
As every engineer knows,
Work = Power Time
Since Knowledge = Power, and Time = Money, we have:
Work = Knowledge Money
Solving for Money, we get:
Money = Work / Knowledge
Thus, as Knowledge decreases, Money increases, regardless of how much Work is done.
Conclusion: The Less you Know, the More you Make.
:
conclusion –
decrease –
executive –
increase –
postulate – ()
rigorous –
solving – :
business executives –
regardless of –
Marxism
Karl Marx remains so far one of the most controversial figures in the field of economics. His
criticism of capitalism, and his promise of a harmonious socialist future, inspired a revolution of
global proportions which brought some economic and political systems to disaster. But, despite
the collapse of socialism in the Eastern Europe it is evident that the Marxist dream had firm
roots in reality. To understand those one has to look through general characteristics of Marxism
– its economics, social theory, and overall vision.
The core of Marxian economics is the labour theory of value elaborated inCapital (1867). Its
general issue is rather simple: the value of a commodity can be measured by the amount of
labour hours that are necessary to produce that commodity.
To illustrate this Marxists usually employ pretty simple examples. If a watch usually takes twice
as long to produce as a pair of jeans, for example, then watches are twice as valuable as jeans.
In the long run the competitive price of watches will be twice the price of jeans, no matter what
the value of the physical inputs is.
Marx was not the inventor of the theory. Marxism is based on the classical economics of the mid
nineteenth century, namely on Adam Smith's The Wealth of Nations (1776) and David