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Paper Abstract: Historical development of monetarism, classical & neoclassical approaches, Keynesianism, supply-side, Reagan administration policy. Theories, principles, practices. Paper Introduction: TABLE OF CONTENTS page Introduction 2 Managing Macroeconomic Variables 2 Classical to Neo Classical 2 Neo Classical Through Keynesian 6 Keynesian Through Monetarism 10 Monetarism Through SupplySide 14 The Brief SupplySide Experiment 16 Conclusion 18 Bibliography 21 MONETARISM'S EFFECTIVENESS IN THE MANAGEMENT OF INFLATION AND UNEMPLOYMENT Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. By contrast, the natural price is a long-term phenomenon determined by thelong-run costs of production. Hyperinflation inLatin America. In this context,a primary area of disagreement was with respect to the reason that money isheld in an economy. (1989, January/February). Ricardo contendedthat costs and profits were the same on all land, regardless of itsmarginal productivity. In early-1983, President Reaganbegan to look like another one-term president. (1982). The tax reform inparticular, however, was hailed as providing the supply-side incentives forproducers, which would lead to surging economic growth. The nominal value of money was expressed inmonetary units. 7 1-7 8). Thus, the supply of loanable funds is affected asfollows: "the volume of commodities offered to be used as capital willincrease as the percentage reward or rate of interest increases" (Cochrane,197 , p. With less success, theadministration also was able to reduce federal spending. The Reagan administration sought and got a tax reform package in 1981that reduced federal government revenues. One way suggested by classical economists to postponethe arrival of the stationary state, however, was to increase wages abovesubsistence levels, which, in turn, would lead to population growth, andwhich, in turn, would lead to increased demand. (Ed.)., ThePhilosophy of Economics: An Anthology. Keynesianeconomic theory with respect to interest thus was essentially a monetarytheory. The Crisis in Economic Theory.New York: Basic Books, Inc., Publishers, pp. . 71). overpower . Neo Keynesian economists viewinflation as a function of monetary aggregates and money holdingpreferences (Gwartney, 1994, p. Whatwould influence the levels of real wages was the level of profits becauseprofits made possible savings. Fisher, Irving. According to thisconception, an increase in consumption reduces savings and in turn the wagefund. In the context of theloanable funds theory, neo classical theorists appear to recognizepreferences for holding money for other than immediate transactions. 97-98). The most visible manifestations of the results of the economicpolicies of the Reagan administration (and later the Bush administration)were the enormous federal budget deficits, and a rapidly growing nationaldebt of almost unbelievable magnitude. the average wage rate over a productiveperiod would be given by dividing the stock of capital by the number ofworkers" (p. The wage fund doctrine held that, at the end of aproduction period, "a given stock of circulating capital is advanced tolaborers to tide them over the next production period . Thus, in order to know whatthe level of disposable income is, it is necessary to first know what theinterest rate is, and vice versa. With respect tointernational trade imbalances and unstable currency exchange rates, neoKeynesians share the neo classical view that these phenomena are functionsof relative measures of economic efficiency within the economies of thecurrencies involved. Keynes, John M. risingrates of interest . Such actions could include increased taxes, reducedgovernment spending, or some combination of the two to attain agovernmental budgetary surplus. New York: Harcourt, Brace and Company. Models and realities in economic discourse.In Bell, Daniel, and Irving Kristol. Both income and the rate of interestare determined by the point at which the two curves intersect. Cardoso, Eliana A. A third major contributor to classical economic thought was JohnStuart Mill. Friedman, Milton. In opposition, the Democratically-controlledcongress refused to cut to any significant degree social expenditureswithout accompanying cuts in defense spending and increases in taxes. In this model, supply always reacts to the stimulus of aggregatedemand. Adam Smith was a contemporary and a friend of David Hume, and hetraveled to France several times to meet with the leading thinkers ofPhysiocracy. Each of the models provides differentemphases in the management of macroeconomic variables.Classical to Neo Classical Raymond Rees differentiated between classical economics, and theclassical school (Rees, 199 , p. 179-193). Eltis, Walter. New York: Basic Books, Inc., Publishers, pp. In his recantation, Mill changed his view on theunchanging character of the fund earmarked for the payment of labor.Classical economists used the fixed character of the wage fund to arguethat in the short-run it was futile for trade unions to attempt to raiseaggregate compensation. (197 ). 434-436). In this context also, neo classical theorists madea distinction between real and nominal values of money (Bell, 1981, p. The loanable funds theory holds that the interest rate is determinedby the intersection of the demand schedule for loanable funds and thesupply schedule for loanable funds. The fact that either set ofpolicies fail when applied in inappropriate circumstances does notinvalidate either monetarism or Keynesianism. Thornton on labor and itsclaims. L. (1994).Economics, 6th ed. 146). Asboth the supply and the demand curves have shifted to the right, the newstatic equilibrium includes prices and quantities at higher levels thancharacterized the displaced static equilibrium. The income on the capitalprovided the employer with the capacity to increase the amount of the fund. 79-1 ). Monetarism, Keynesian, or some combination of the two theoreticalapproaches can all have positive effects on both inflation and employmentwhen the conditions in which they are used are appropriate. . The views of John Maynard Keynes, MiltonFriedman, and other economic theorists are considered in the assessment ofmonetarism and alternative theoretical strategies for the control ofinflation and unemployment. 98). 11-19). In the context of thequantity of money theory and consistent with the principal of substitution,the neo classical theory held that money was held primarily fortransactions purposes. 7 3). Cochrane, J. (1869, May-June). Inflation is viewed by theseeconomists within the context of comparative static equilibrium analysis.In such an analysis, price and quantity are functions of supply and demand. The general theory of employment, interestand money. Keynes also contended, however, thatreasons other than transactions existed for the holding of money. 46-8 . Neo Keynesian economists view unemployment as a function of fallingdemand (Eltis, 1991, pp. According to Ricardo, as costs and profits were the same on allcultivated land, a surplus was earned on non-marginal land. Ricardo calledthis surplus earned on non-marginal land "rent." Ricardo thought that theconsequence of this relationship was that, as the population expanded andless-fertile land was brought under cultivation, profits became squeezed byan increasing proportion of total output that was allocated to rent, andthe basic minimum level of subsistence that was allocated to labor wages. Thussubsequent to the inauguration of President Reagan in 1981, supply-sideeconomics provided the basis for Reagan administration fiscal policy, whichwas dubbed Reaganomics. D., R. TheCrisis in Economic Theory. 17 -171). 28 -282). Demand may be stimulatedthrough tax reductions to increase discretionary income, by reductions ininterest rates on savings to encourage current consumption, or through anyother actions that would have the effect of creating an increase indiscretionary income. The tax reduction goal of supply-sideeconomists continued to be sought by the Reagan administration; however,attempts to reduce government spending became a propaganda exercise for theadministration wherein the administration sought to reduce spending onsocial programs while seeking increased spending on military programs, butwas quite prepared to trade-off cuts in social spending for increases inmilitary spending. . Classical and neo-classical monetarytheory. Bell, Daniel. Classical economists thought that a stationary state would ultimatelybe reached, wherein all economic growth would cease (Ekelund and Hebert,1993, pp. 68). . In turn,economic efficiency is viewed as a function of economic growth, whereinproductivity improves during periods of economic growth. This combination of theKeynesian and the neo classical loanable funds theories of interestprovides a determinate monetary theory. 23-26). (1985). H. 35). Supply-side economists think that inflation, unemployment, anddeclining economic growth are the results of declining productivity(Ekelund and Hebert, 1993, p. About the closest to thedevelopment of a body of economic theory that supply-side fiscalists evercame was the simplistic "good news" Laffer Curve (gwartney, Stroup andStudenmund, 1994, p. 3 -35. A history of economictheory and method, 4th ed. Harmondsworth,England: Penguin Books, Ltd. The loanable funds theory, therefore, isan indeterminate one with respect to its capability to permit the actualdetermination of interest rates before the fact. Studenmund. 467). . Gwartney, J. Smith also contended,however, that the factors of supply and demand also affected the actualprice levels (inflation) of commodities in the market place. (199 ). 335). Thus, to stimulate economic growth, neo classicaleconomists would recommend the implementation of policies designed tostimulate savings. Fortnightly Review: pp. Harmondsworth, England: Penguin Books, Ltd.----------------------- 1 Monetarism was pronounced deal by many people(Meltzer, Walters, Brooks and Reynolds, 1991, pp. 5 5-518, 68 -7 ).Mill eventually recast the wage fund into two parts--the actual capital inthe fund, and the income earned on that capital. Acceptable face ofmonetarism. (1991). In the context of thisdifferentiation, Rees stated on the one hand that the classical period ofeconomics began with Adam Smith's Wealth of Nations in 1776 and ended withJohn Stuart Mill's Principles of Political Economy in 1848, while on theother hand including Alfred Marshall and Arthur Pigou in the classicalschool. (1981). In turn, prices and interestrates are functions of monetary policy--expansionary or restrictive, andmay be dealt with in the context of such policies (Bartholomew, 1989, p.65). Utility analysis was applied to this approach to the supplyof loanable funds as a way of demonstrating exactly how much savings wouldbe made available for loans to business firms and to other investors undervarying changes in the rate of interest (Fisher, 1964, pp. Although some brief initial successeswere achieved, the application of monetarist policies in the region provedto be a colossal failure. It relies, instead,on the purchasing power parity (PPP) model that holds that exchange rateequilibrium is present when the domestic purchasing powers of thecurrencies involved are the same. In the monetarist view, trade imbalances and unstablecurrency exchange rates are functions of price levels and interest rates inthe economies of the currencies involved. Smith, Adam. The principal sources of such money are the savings ofindividuals and businesses, increases in the money supply through actionsby government and financial institutions, and dishoarding from idlebalances. The Reaganomics moniker lasted into the first orsecond year of the second term of the Reagan administration; however, theinfluence of supply-side economists all but disappeared after the midtermcongressional elections in 1982. World Development, 1 : pp. Mill is remembered especially for his recantation of the wagefund doctrine. . TABLE OF CONTENTS pageIntroduction 2Managing Macroeconomic Variables 2 Classical to Neo Classical 2 Neo Classical Through Keynesian 6 Keynesian Through Monetarism 1 Monetarism Through Supply-Side 14 The Brief Supply-Side Experiment 16Conclusion 18Bibliography 21 MONETARISM'S EFFECTIVENESS IN THE MANAGEMENT OF INFLATION AND UNEMPLOYMENT Introduction This research examines the effectiveness of monetarism in themanagement of inflation and unemployment. Post Keynesian economics: Solving the crisisin economic theory. In Hausman, D. Therefore,actions to promote economic growth, in the view of these economists, wouldalso lead to the correction of trade imbalances and unstable currencyexchange rates.Keynesian Through Monetarism The economics of John Maynard Keynes did not challenge neo classicaleconomic theory so much as it challenged classical economic theory(Hausman, 1984, p. Productivity would not influence the level of real wages. In Clower R. Full employment, thus, is consistent withdifferent combinations of the real exchange rate and the budget deficit asa proportion of income. Thus, in the Keynesian model there is a link between a full-employment deficit or surplus and aggregate demand. It holds that, in the long-run, "money did not matter" (Samuelson, 1982, pp. Thetheory, however, states an opposite position. 23-25). --- (1985, April 27). (Eds.). 23-25). 345). Keynes challenged thiscontention, and the economic decline of the 193 s proved Keynes' point. At thispoint of intersection, investment and savings are in equilibrium, and moneysupply and money demanded are in equilibrium. This model "implies thatdisinflation is . Monetarists tend to view all macroeconomic phenomena within thecontext of the supply of money (Gwartney, Stroup and Studenmund, 1994, p.295). Keynesian theory provides liquidity preferences associated withdiffering income levels. 149-183). 3 -35).The Brief Supply-Side Experiment Supply-side economic theory is an approach to fiscal policy(gwartney, Stroup and Studenmund, 1994, p. "Anincrease in the budget deficit ratio raises the financing requirement, withmoney demand inelastic with respect to the inflation an increase ininflation is required to finance the deficit" (Dornbusch, 1985, pp. Two of the most influential of the first-generation market economistswere Adam Smith and David Ricardo. In the formulation of economic theory,Adam Smith was principally concerned with the factors which led toincreased wealth in an economy. 7 ). (1964). Thus in Keynesian analysis, given the totalmoney supply, it is not possible to determine what quantity of money willbe available to hold as an asset, unless the real income level (and hencethe transactions demand for money) is first known. Interest rate increases to stimulatesavings would also be recommended. 325). Monetarism, however, does not always work in practice as it does intheory. The purchasing power of money. Monetarism: An ebbing tide? (1984). The Keynesian liquidity preference schedule includes both thetransactions demand and the assets demand for money. The loanable funds supply schedulevaries with the level of disposable income. Then with no publicannouncement, the fiscal gears of the administration were shifted, and analmost pure Keynesian fiscal policy was implemented by the administration,and a friendly Federal Reserve cooperated in the context of monetary policy--a surge in the money supply accompanied the new fiscal policy. Market price, in this, view, is a short-term phenomenon that is a function of the interaction of supply and demand. Meltzer, Allan H., Alan Walters, Warren T. Neo classicists view economic growth as a function of investment. Smith contended that the cost of laborprovided the basis for the determination of the value of a commodity(Smith, 1978, pp. What the Reagan faction desiredabove all else were reductions in taxes and government spending. Although neo classical economists recognized that purelynominal events could occur, which, in turn, could affect the real value ofmoney, they thought that such effects were possible only in the short-run.Thus, they thought that in the long-run individuals sought to maintain realmoney balances. Further confounding the establishment of an end boundary forclassical political economy is the law of markets of Jean-Baptiste Say.Say's law held that an under utilization of resources could not occur.Based in great part on this contention, most economists prior to JohnMaynard Keynes contended that prolonged economic depressions could notoccur (Ekelund and Hebert, 1993, pp. The IS curve and the L curve are in effect schedules that relate theincome and interest rate variables. New York: McGraw-Hill Book Company. While neither David Hume nor the Physiocratthinkers are included in the classification of classical economists, thefuzzy boundary between classical economic theory and that thinking whichpreceded it does not permit their complete exclusion from the classicalschool. 7 1-7 8. Macroeconomics before Keynes. (1991). B., and R. . 6 ). In turn, economic efficiency is viewed as a functionof economic growth, wherein productivity improves during periods ofeconomic growth. Inturn, these economists view investment as a function of savings (Rees,199 , p. Supply-side economics was seldom mentioned again,although the supply-side goal of tax reduction continued to be pursued bythe Reagan administration in its second term. Neo classical economics experienced a rebirth subsequent to the endof the Second World War (Rees, 199 , p. The loanable funds theoryprovides a set of savings schedules which are related to a variety ofincome levels. Neo classical theory emphasizes supply, and demand is viewed as afunction of supply. The failure of themonetarist policies of the Federal Reserve and of the Reagan Administrationin the 1981-1983 time period led to a change of policy in mid-1983 thatbrought about a "bizarre and extreme mix" (pp. . Mill, John Stuart. Of the aggregate amount spent on wages, Mill said,in his recantation, "there is an impassable limit to the amount which canbe so expended; it cannot exceed the aggregate means of employing classes.It cannot come up to those means; for the employers have also to maintainthemselves and their families. Samuelson, Paul A. The neo classicalloanable funds theory also failed as a tool of analysis because it too wasindeterminate. M. Hausman, D. The monetarist model alsopresumes that real interest rates are fixed at the world level. (1993). Supply-side economictheory opposes the Keynesian model in which aggregate demand is thepropelling force. New York:McGraw-Hill Book Company, pp. Within this model,thus, fiscal policy attempts to stimulate demand as a means of promotingeconomic growth. (1936). 11-19. By 1869, however, hehad changed his view. Davidson, P. There were areas, however, where Keynes disagreedwith the conventional wisdom of neo classical economists. New York:McGraw-Hill. Hume's contention that the rate of interest depended onthe rate of business profits formed the basis for Smith's interest ratetheory, and Hume's quantity of money theory remains a part of economictheory. 97). Monetary Theory: Selected Readings. 65. Lloyds Bank Annual Review: pp. Mill initially accepted the wage fund doctrine. The new monetarism.Lloyds Bank Annual Review 4: pp. 7 2). The cure to the problem ofunemployment, therefore, is to stimulate demand. Together,these two sets of schedules may be used to derive an investment-savings(IS) curve, which, in turn, describes the functional relationship betweenthe interest rate and savings and investment rates. Thus, supply-side economists never had anythingdirectly to say about trade imbalances and unstable currency exchangerates. Monetary theory. By combining these data with knowledge of thesupply of money established by the monetary authority in the economy, an"L" curve may be constructed, which reflects interest rates associated withdiffering income levels. In this model, higher government spending (orlower taxes) results in higher demand for domestic goods, and,consequently, higher prices for domestic goods. Cyclical activity wouldrequire a repeating of this process periodically. Stabilization policies in developingcountries: What have we learned? . Brooks, and Alan Reynolds.(1991, November 4). When the economy recovered, however, a true Keynesian approach wouldhave stopped the stimulation of the economy, and would have moved to returngovernmental finance to a stable position. Thispresumption may be made, because the model assumes a "perfectsubstitutability between domestic and foreign assets" (p. The real exchange rate is the relationship betweenexport and import prices. Cambridge, England: CambridgeUniversity Press, pp. 162-189. Dornbusch, R. 124-159. 111-113). Keynes did not disagree with the neo classicaleconomists with respect to two points concerning the holding of money.First, he agreed that money was held for purposes of transactions (Keynes,193 , pp. It is the contentionof the supply-side fiscalists that relative price changes induced throughgovernmental tax and expenditure policy will generate productionincentives, thereby promoting economic growth. Classical economists,however, would not condone governmental management for this objective.Neo Classical Through Keynesian Neo classical economic theory began to develop in the late-nineteenth century (Hausman, 1984, p. Mundell, Robert A. For fiscal policy, thesupply-siders argued for tax reductions and governmental spendingreductions. As buyers' income increases demand increases and in turn prices increase.Equilibrium is restored as supply is increased to the level of demand. The early development of thetheory was based upon the concept of utility (individuals act to maximizetheir own utility), the idea that consumers are not satiated (individualsgenerally prefer more to less), the principle of substitution (if a unit ofproduct one equal in value to a unit of product two, and, if 4 units ofproduct one or 3 units of product two are available at the same price,consumers will prefer product one, regardless of what the two products maybe) and the concept of diminishing returns (each additional unit of aproduct adds to one's utility, but does so at a diminishing rate). Kaldor, Nicholas, and Milton Friedman. Economics: A history. Thus, while Adam Smith is considered to be the founder ofclassical economic theory, he nevertheless incorporated several importantconcepts into his theory from thinking not generally ascribed to theclassical school. When suchtheories are treated as dogma and are applied regardless of the prevailingconditions, however, disaster can and usually does strike. Economic growth is viewed by neo Keynesians as a function of demand(Eltis, 1991, pp. The loanable funds theory provides information as to the levels ofincome in an economy that will be associated with differing rates ofinterest. 134-139). These outcomes are partly theresult of the implementation of supply-side fiscal policies at aninappropriate time, but are largely the result of the borrowing of bits andpieces of supply-side fiscal theory by the Reagan administration, whichthen added those bits and pieces Keynesian-style pump priming and createdalarming long-term consequences for the economy. 23-25. 11-19. In actualpractice, however, the producer incentives were implemented during a timewhen demand was declining rapidly, and under such conditions all theproduction incentives in the world will not persuade producers to creategoods for which no demand exists. With the shift in fiscal and monetary policies, the economy began torecover, and the economic recovery led to a Reagan victory in the 1984presidential election. Keynesian theory provides a family of investment-demandschedules which are also related to a variety of income levels. Introduction. Far Eastern Economic Review, 145: p. London: Macmillan. 227). Similarly, expanding and restricting themoney supply may be used to either stimulate or retard economic growth andin turn employment. (1991). 275). Recognizing the deficits and the strengths of both the neoclassical and the Keynesian explanations, several neo classical economistsformulated the so-called neo classical synthesis of neo classical andKeynesian theory (Davidson, 1981, p. The liquidity preference schedule will shift up or down with changesin the real income level. The policies of both monetarism and Keynesianism can beeffective under appropriate circumstances. Assuming that thegeneral equilibrium principle was valid, most neo classical economists heldthat a prolonged economic depression was not possible. (193 ). The wealth of nations, 1776, Pelican Classicsed. By contrast, supply-side fiscalists emphasize the interrelationshipbetween governmental tax and expenditure policy, and aggregate supply(Gwartney, Stroup and Studenmund, 1994, pp. In the long-run also,the level of labor demand is determined by the size of the wage fund whichin turn is determined by the level of savings. Monetarism was applied in Latin America to combat inflation in the198 s (Cardoso, 1989, pp. F. 33). The monetarist model for stabilizationassumes an "exact or, at least, dominant purchasing power parity," andemphasizes domestic credit rules as the mechanism of payments control andadjustment (Dornbusch, 1985, p. (1978). The failure of Keynesian conventionalwisdom. But, short of this limit, it is not, in anysense of the word, a fixed amount" (Mill, 1869, pp. Theappropriate corrective measures, thus, are seen as fiscal reform and realdepreciation (p. In the short-run, there would be a given number ofworkers and a given amount of savings to pay their wages. In the long-run,the supply of labor according to the doctrine is related to the minimumsubsistence required to maintain the labor force. 131-136). 79-1 . The actions discussedabove with respect to demand stimulation would be recommended, along withdecreased taxes, increased governmental spending, or some combination ofthe two to generate a governmental budget deficit. Second, Keynes agreed that the transactions demand formoney was related to income levels. (1981). The non-monetarist modelfocuses on the role of the real exchange rate and on the budget deficit asa share of income. Stroup, and A. Classical economists thought theprocess would then reverse itself leading to an increase in employment.Thus, classical economists would not implement governmental policy to dealwith unemployment. The four concepts and principles stated above permitted neo classicaltheorists to develop the general equilibrium principle that holds that aneconomy is always in equilibrium (Hausman, 1984, p. (Eds.). 34). Rees, Raymond. 142-144). In explaining capital accumulation, savings, investment, andinterest, neo classical economists developed and primarily relied upon thetheory of loanable funds (Cochrane, 197 , p. Thus, actions to promote economic growth, inthe view of these economists, would also stimulate employment. 7 3). Keynes further contended that the rate ofinterest is determined by the intersection of the supply schedule of moneyand the demand schedule for money (Keynes, 1936, pp. Hebert. In the context ofmonetary theory, the neo classicists adhered to the quantity of moneytheory (Ekelund and Hebert, 1993, pp. Although most economic stabilization programs address each of fourfactors--budget, exchange rate, money supply growth, and interest rates,the relative emphasis placed on each of them tends to vary, depending uponthe theoretical orientation of the program. Economist, pp. David Ricardo built upon the work of Adam Smith. . Theresults of this absurd situation included an almost complete destruction ofthe fiscal integrity of the federal government, stimulation of the economyduring the boom phase of the business cycle, very high real (as opposed tonominal) interest rates, and a failure to effectively address the problemsof millions of individuals who suffered significant economic dislocationproblems during the recession. 124-159). 151-173. Theresulting upward sloping curve derives from the "fact that . The quantity of money theory is at the heart of monetarism(Kaldor, 1991, pp. 11-19). costless" (p. 1-5 . The monetarist model moves away from a fiscally-based explanation ofthe stabilization problem (Friedman, 1991, pp. A similarinability to adjust a revered theoretical approach led to monetarism'sdownfall. Monetary policy in a flat world. (1989, August 17). As a consequence, the economy plummetedinto the worst recession since the 193 s and the federal government budgetdeficit soared. Neoclassical economists view international trade imbalances and unstablecurrency exchange rates as functions of relative measures of economicefficiency within the economies of the currencies involved. To reverse productivity declines,supply-side economists recommend tax reductions, balanced governmentalbudgets, the deregulation of industry, and reduced social welfare spendingto encourage people to work for lower wages. H. Smith further contended that it was therelative expenditure of labor that mattered. The approval rating of President Reagan plummeted along with theeconomy, and the Republican Party absorbed a worse than usual drubbing inthe 1982 congressional midterm elections. Keynes, John M. References Bartholomew, James. The non-monetarist model implies that both domestic inflation andexternal balance of payments deficits are caused by budget deficits. Challenge 32: pp. 151). Hisliquidity preference theory, thus, was a major departure from neo classicaleconomic theory. Ekelund, R. Ricardo further contended that as labor cost thesame regardless of which land on which it was applied it would encouragecapital to be invested at the place of highest return, until the process ofdiminishing returns caused profits on all cultivated land to become equal. Thus, in the view of classical economistsprice inflation was a temporary phenomenon, and equilibrium would berestored through a self-adjusting market mechanism over the long-term.Classical economists, therefore, would not implement governmental policy todeal with inflation. New York: Academic Press. . Further, the higher budgetdeficits created require correction through real depreciation. President Reagan, however,refused to cut government spending on national defense, or to even consideran increase in taxes. Therefore, actions to promote economic growth, in theview of these economists, would also lead to the correction of tradeimbalances and unstable currency exchange rates.Monetarism Through Supply-Side Monetarist economic policy experienced an ascendancy in the wake ofthe failure of Keynesian and neo classical policy makers to adjust to achanging environment ("Monetarism..." 1985, pp. 124-159). preference for present, overfuture, consumption" (Cochrane, 197 , p. (Ed.). Sluggish growth, thus, would be countered byfiscal actions to place more money in the economy. Managing Macroeconomic Variables The monetarist economic model is compared to the classical, neoclassical, neo Keynesian, and supply side models within the context of themanagement of macroeconomic variables, of which inflation and unemploymentare two of the most significant. The wage fund theory was developed by Adam Smith and itbecame a cornerstone of classical economic theory (Ekelund and Hebert,1993, pp. 7 3). 5 5-518, 68 -7 . In Bell, Daniel, and Kristol, Irving. Thus, according to monetarists, inflation is an outcome of anexpansionary monetary policy and can be corrected through a morerestrictive monetary policy. In crude terms,the doctrine indicated that . Atlanta:Scott, Foresman and Company. In such a situation, theaction required to correct inflation would be to increase supply. Is monetarism dead? (1971). . In this context, the classical economists thought thatunemployment occurred when product demand increased to the point where alabor shortage developed, that in turn caused the price of labor toincrease, that in turn caused product prices to increase, which in turncaused product demand to decrease to the point where a labor surplusdeveloped and unemployment occurred. Classical economists viewed inflation in terms of market price(Ekelund and Hebert, 1993, p. Neo classical economists view unemployment as afunction of economic growth. Unemployment was also viewed by classical economists as a function ofsupply and demand. National Review, pp. Keynes contended that preferences for holding money for reasons otherthan transactions would, in many instances, invalidate the neo classicalexplanations of capital accumulation, savings, investment, and interestrates (Mundell, 1971, pp. Loanable funds arecomprised of the money which is available for lending to individuals andinstitutions. A treatise on money. Santa Monica,California: Goodyear Publishing Company, Inc. Conclusion The supply-side approach to fiscal policy was made-to-order for theReagan campaign for presidency in 198 . The real value of money was expressed in terms of the tangible productsand services money would buy. The Keynesian model is based on the premise that untilthe capacity constraint is reached within an economy supply remainspassive. While Smithconsidered that the factors of supply and demand were the majordeterminants of commodity prices, the value of labor consumed in theirproduction was held by Smith to provide the basis for the determination ofvalue of commodities. Fiscal actions would be recommendedto counter inflation. LloydsBank Annual Review: pp. Assessing the effectiveness ofmonetarism for the accomplishment of these tasks requires the considerationof alternative economic theories. The theorycontinued to hold that money was held only as needed for transactions, andthat real as opposed to nominal values of money determined the amount to beheld. If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.