THE REVIEW OF EXISTING LETURERS
Discretion verses rule is the controversy between monetarist and fiscals regarding. The determination of growth rate of motley supply in the economy. The central issue between them is that whether central bank should have free hand in determined the growth rate of money supply. Or it should be dictated by some rules. Monetarist claim that monetary policy is very potent but they do not recommended use of discretionary monetary policy on the following arguments.
1. According to monetarist long run growth rate of productive capacity of the economy is 4 to 5% annually, to met lite requirement of an expanding economy money supply should also be increased increase in line with the production capacity, so they recommend formulation of a rule that whenever there is need for he growth cate of money supply. It should be done accordingly. They do not favor that central bank should have a free hand in the growth of money supply because ill discretion is given to the central authority. It can issue currency in a great ratio as compare to Productive capacity.
2. According to monetarist historic record between the •elation ship of money supply and output support the establishment rule. They supported their arguments with the help statistical data all economic fluctuation in the past history has been due to monetary mismanagement therefore they do not recommend that discretionary power should be given to central finance institution. They also believe that discretionary power will create mismanagement regarding the growth rate money supply.
3. Monetarist which are follower of old classical traditions believe least intervention of government in economic activities. According to monetarist giving of discretionary power will provide maximum opportunities to the government to the intervention the economy therefore they recommend creation of specific rule for the growth of money supply with least government intervention.
4. According monetarist money supply is an exogenous factor. Supply should not be related to the level of economic activities through the discretionary power of central bank. They also believe that thew is causal relationship between growth rate of money supply and growth rate of national income. They claim this relationship can only be maintained while there are some rules for the Continuous of money supply. Therefore they favor the establishment of rules.
5. According to monetarist economy stable even ill the modern time, they believe that there are automatic forces which bring self-equilibrium in the economy. They assign all business situations 10 the monitory mismanagement. They favor that no power should be given to monitory authority because it will be against the working of automatic forces in the economy.
6. In modern literature 01 economics monetarist can be called the political conservative. They favor only the establishment and supremacy oi rules even in the economy. They are not of favor that discretionary power should be given to the monitory authority which is actually run by the government. On the above grounds we can say that monetarist are in favor of discretionary monetary policy.
In contrast to monetarist, fiscal economist favor the discretionary.
Power of monetary authority on the following basis.
1. According to the fiscals money supply is an endogenous factor, they point that there is reveres causal relationship between growth rate of money supply and growth rate of national income. They believe that money supply respond positively to change the level of national income. They favor that in order to meet there requirement of changing conditions monetary authority should have
free hand for the management of money supply in the economy.
2. According to them there may occur different time's periods when an urgent need for the money supply may be and it can take time for the formulation of rules by some legal authority.
3. According to fiscals there are non-monetary causes of business fluctuations. According to them controlling of these fluctuation or not always through monetary management. We have to apply other resources also to control such business fluctuations.
4. According to fiscals in the modern lime period understanding of macro-economic forces forecasting ability have improved in the recent time period .so policy errors occur less frequently therefore they favor giving if powers to monetary authority.
5. According to fiscalist international economic, political [actors effect financial market of any country to control such effects can only be through the discretionary power of monetary authority. By using these powers monetary authority can applied different policy keeping in view international economics events.
6. Fiscals claims that in the modern time economics of the world are interrelated, there are many financial institution such as I.M.F, I.B.R.D World Bank, GATT, which affect the economy of a nation directly or indirectly.
7. According to fiscals self-equilibrium forces ill the economy are very slow and there is no such invisible hand which brings automatic adjustment in the economy, only discretionary monetary policy properly applied can improved economic performance.
8. Fiscals which are called more liberal democrats believe that government international with certain power is must for the economy. According to them growth rate of money supply should not be related to growth rate of national income only as monetarist believe. They advocate that there is much expenditure which are unproductive but necessary for the stability of the country. The requirement of such expenditure can only be met, if central bank or monetary authority has discretionary power for growth of money supply.
On the above grounds fiscals favor the use of discretionary
Monetary policy
1. According to monetarist long run growth rate of productive capacity of the economy is 4 to 5% annually, to met lite requirement of an expanding economy money supply should also be increased increase in line with the production capacity, so they recommend formulation of a rule that whenever there is need for he growth cate of money supply. It should be done accordingly. They do not favor that central bank should have a free hand in the growth of money supply because ill discretion is given to the central authority. It can issue currency in a great ratio as compare to Productive capacity.
2. According to monetarist historic record between the •elation ship of money supply and output support the establishment rule. They supported their arguments with the help statistical data all economic fluctuation in the past history has been due to monetary mismanagement therefore they do not recommend that discretionary power should be given to central finance institution. They also believe that discretionary power will create mismanagement regarding the growth rate money supply.
3. Monetarist which are follower of old classical traditions believe least intervention of government in economic activities. According to monetarist giving of discretionary power will provide maximum opportunities to the government to the intervention the economy therefore they recommend creation of specific rule for the growth of money supply with least government intervention.
4. According monetarist money supply is an exogenous factor. Supply should not be related to the level of economic activities through the discretionary power of central bank. They also believe that thew is causal relationship between growth rate of money supply and growth rate of national income. They claim this relationship can only be maintained while there are some rules for the Continuous of money supply. Therefore they favor the establishment of rules.
5. According to monetarist economy stable even ill the modern time, they believe that there are automatic forces which bring self-equilibrium in the economy. They assign all business situations 10 the monitory mismanagement. They favor that no power should be given to monitory authority because it will be against the working of automatic forces in the economy.
6. In modern literature 01 economics monetarist can be called the political conservative. They favor only the establishment and supremacy oi rules even in the economy. They are not of favor that discretionary power should be given to the monitory authority which is actually run by the government. On the above grounds we can say that monetarist are in favor of discretionary monetary policy.
In contrast to monetarist, fiscal economist favor the discretionary.
Power of monetary authority on the following basis.
1. According to the fiscals money supply is an endogenous factor, they point that there is reveres causal relationship between growth rate of money supply and growth rate of national income. They believe that money supply respond positively to change the level of national income. They favor that in order to meet there requirement of changing conditions monetary authority should have
free hand for the management of money supply in the economy.
2. According to them there may occur different time's periods when an urgent need for the money supply may be and it can take time for the formulation of rules by some legal authority.
3. According to fiscals there are non-monetary causes of business fluctuations. According to them controlling of these fluctuation or not always through monetary management. We have to apply other resources also to control such business fluctuations.
4. According to fiscals in the modern lime period understanding of macro-economic forces forecasting ability have improved in the recent time period .so policy errors occur less frequently therefore they favor giving if powers to monetary authority.
5. According to fiscalist international economic, political [actors effect financial market of any country to control such effects can only be through the discretionary power of monetary authority. By using these powers monetary authority can applied different policy keeping in view international economics events.
6. Fiscals claims that in the modern time economics of the world are interrelated, there are many financial institution such as I.M.F, I.B.R.D World Bank, GATT, which affect the economy of a nation directly or indirectly.
7. According to fiscals self-equilibrium forces ill the economy are very slow and there is no such invisible hand which brings automatic adjustment in the economy, only discretionary monetary policy properly applied can improved economic performance.
8. Fiscals which are called more liberal democrats believe that government international with certain power is must for the economy. According to them growth rate of money supply should not be related to growth rate of national income only as monetarist believe. They advocate that there is much expenditure which are unproductive but necessary for the stability of the country. The requirement of such expenditure can only be met, if central bank or monetary authority has discretionary power for growth of money supply.
On the above grounds fiscals favor the use of discretionary
Monetary policy
CAUSATION RELATION SHIP
Causal Relation Ship HYP, is the controversy between
monetarist and fiscals regarding the relationship between growth rate of money
supply and growth rate of national income.
VIEW OF MONETERIST:
Monetarist believes that there is causal relationship between growth rate of money supply and growth rate of national income. According to them all the fluctuations in the economic activities are due to monetary fluctuation. They have supported their argument on the basis of two publications.
1. Monetary History of U.S.A. from 1867 to 1960 written by Milton fried man and Anna Schwartz.
2. The publication relative stability of monetary velocity written by Milton fried man and divide mislead in 1960.
In these two publications, they have proved that all the major fluctuation in economic activities are due to monetary disturbances. According to them business cycle are monetary phenomenal their relationship explain that first there are change in money supply and it bring a change is level of national income.
Diagram
In the above diagram growth rate of money supply and growth rate National Income lines are shown. According to monetarist the peak point B will bring point C similarly. The lowest point D will bring point E. In other words we are say that first there is change in growth rate of money sup l! And it bring a resulting change in National Income.
THE VIEW OF FISCALIST.
The fiscals believe in reverse causation. According to them, business fluctuations are not due to monetary fluctuation. They believe that business. Cycles are a result of change in component of AD. According to them, first there is a change in level of National Income and then it brings a change in money supply. As shown in
![]()
D Y/Y Chang in level of national income
Diagram:
Explanation.
According to fiscalist the peak point A will bring the peak point similarly. The lowest point E will bring the other lower point F. This relationship has been explained with the help of acceleration, multiplier of Paul Simmon. Similarly, JR.Hicks has explained this relationship business fluctuation theory.
In this way we have explained that two school of economics have different views regarding the relationship between growth rate of money supply and growth rate of national income.
HISTORICAL ANALYSIS OF USA ECONOMY
Milton fried man and Anna Schwartz have explained that there is a close relationship between the fluctuation of money supply and fluctuation of national income. They have based their study on historical factors .they have published monetary history of USA from 1867 to 1960 published in 1968.
in this Milton fried man and Anna Schwartz have found in their study that rate of change of money supply regularly reached at peak point below the peak in level of national income and thought before the thought in level ()I national income. They found that amplitude of the cyclical movement in money supply is closely related with amplitude of cyclical movement in national income. These two economists have given a dominant to the behavior of money supply accruing in the economy. We analysis different years from the above mention monetary history of USA.
FROM 1873 TO 1879
During this period there have been a civil war in the country to met the war expenditure a fait money was printed .generally known as yellow seal dollor. During the civil war it was difficult for the government to converted paper currency in to gold. A large important surplus due to lower prices of European has been accrued.
FROM 1893 TO 1894:
After returning to gold standard money supply was reduced due to lower world trade and adoption of bi metic system of gold and silver and Sherman silver act of 1890 due to which USA treasury was allowed to purchase double quantity of monthly purchase of silver and gold due to this act and adoption of bimetallism standard out of gold was started, money supply was reduced and recession in period has occur.
PERIOD OF 1907 T0 1908:
During this period an out flow of gold has started money supply has reduced, many banks were close down public demand to hold more currency in cash form so, banks go on failing .the tailing of banking system lead congress for the creation of central financial authority (F. R .S) .This federal reserve system was a hope for the stability of financial system in economy.
THE PERIOD OF 1920 TO 1921:
During this period country act the inflation during the world war first (F.R.A) raise the rate of discount 4.75% to 6% and then 7% in him, 1920. This produce decline in money supply of 5% and industrial product index was reduce from 10010 124% in 1921.in this way the depression during this period was due to monetary mismanagement.
FROM 1929 TO 1933
During this period a stock market crash in Oct 1929 in disband berg, let the whole economy towards a major depression. Banks and financial institution was close down. by Nov 1930 to 56 banks were close down and their number was raised to 352 by Dec 1930.policy of (FRS)also work responsible for the failure of finance market in this way according to tried man the major depression of 1929 to 1933 was a resulted Of monetary factors.
PERIOD OF 1937 TO 1938
According to Freidman and Schwarz during this contraction of money supply was a result of forces that were UN related to business activities. In this way the monetary contraction caused economic recession during this period.
INFLATION AS A MONETARY PHENOMENA:
In the study of Friedman and Anna Schwan. The peak period in the history of USA during the period 1867 to 1960 have been a result of increase in the growth of money supply.
PERIOD OF 1951 TO 1960
In the study of fried man and Schwarz the rate of inflation during the period of 1951 to 1960 was a result of deficit finance which was equal to 1.46 billion per year but this was raised to 5.2$billion average per year. In this way monetarist regarding inflation are sustained increase in money supply.
THE OBJECTIVES.
MAIN OBJECTIVE.
To examine the relationship between deficit financing and price level in the economy.
SUB-OBJECTIVE.
I. To increase level of national income in UDCS.
II. Alleviation of poverty in the economy.
III. To reduce level unemployment.
IV. To increase Government investment.
V. To establish a new relation between growth rate of money supply and level of national income.
ASSUMPTIONS
1. Labor Forces is fully mobilized in the economy.
2. Government Institution play sensitive role in administration.
3. There is excess stock of agriculture inputs in the country.
4. Present output of Land is not at optimal level.
5. All the irrigation land in country is not cultivated yet.
CONCLUSION
We may use monitory policy as well as fiscal policy to break the bottle neck of economy in an UDC Because there is lack of funds in poor country so these funds may be provided by any one of these policy level of N.I. employment and output will be increase in the economy by using method of deficit Financing.
REFERENCES
1. The economy development and planning by ML JHINGON
2. Macro economy analyses by Edward Shapiro.
3. Economy planning & Development in Pakistan by A.H. Shahid.
4. Exploring forces of economic growth by Garry ever ding.
5. World economic survey O.P.Cvt.P. 26
6. W.A. Lewis italics mine.
7. Capital funds in under develop country by NEVIN
8. All Indian rural credit survey P-220-270
9. Monetary history of USA from 1867 to 1960 by Milton Friedman and Anna stalwarts.
10. The relative. Stability of monetary velocity by Milton Fried man and dived Misleman
11. Business fluctuation JR.HICKS.
ABBREVIATIONS
1. Monetary History of U.S.A. from 1867 to 1960 written by Milton fried man and Anna Schwartz.
2. The publication relative stability of monetary velocity written by Milton fried man and divide mislead in 1960.
In these two publications, they have proved that all the major fluctuation in economic activities are due to monetary disturbances. According to them business cycle are monetary phenomenal their relationship explain that first there are change in money supply and it bring a change is level of national income.
Diagram
In the above diagram growth rate of money supply and growth rate National Income lines are shown. According to monetarist the peak point B will bring point C similarly. The lowest point D will bring point E. In other words we are say that first there is change in growth rate of money sup l! And it bring a resulting change in National Income.
THE VIEW OF FISCALIST.
The fiscals believe in reverse causation. According to them, business fluctuations are not due to monetary fluctuation. They believe that business. Cycles are a result of change in component of AD. According to them, first there is a change in level of National Income and then it brings a change in money supply. As shown in
D Y/Y Chang in level of national income
Diagram:
Explanation.
According to fiscalist the peak point A will bring the peak point similarly. The lowest point E will bring the other lower point F. This relationship has been explained with the help of acceleration, multiplier of Paul Simmon. Similarly, JR.Hicks has explained this relationship business fluctuation theory.
In this way we have explained that two school of economics have different views regarding the relationship between growth rate of money supply and growth rate of national income.
HISTORICAL ANALYSIS OF USA ECONOMY
Milton fried man and Anna Schwartz have explained that there is a close relationship between the fluctuation of money supply and fluctuation of national income. They have based their study on historical factors .they have published monetary history of USA from 1867 to 1960 published in 1968.
in this Milton fried man and Anna Schwartz have found in their study that rate of change of money supply regularly reached at peak point below the peak in level of national income and thought before the thought in level ()I national income. They found that amplitude of the cyclical movement in money supply is closely related with amplitude of cyclical movement in national income. These two economists have given a dominant to the behavior of money supply accruing in the economy. We analysis different years from the above mention monetary history of USA.
FROM 1873 TO 1879
During this period there have been a civil war in the country to met the war expenditure a fait money was printed .generally known as yellow seal dollor. During the civil war it was difficult for the government to converted paper currency in to gold. A large important surplus due to lower prices of European has been accrued.
FROM 1893 TO 1894:
After returning to gold standard money supply was reduced due to lower world trade and adoption of bi metic system of gold and silver and Sherman silver act of 1890 due to which USA treasury was allowed to purchase double quantity of monthly purchase of silver and gold due to this act and adoption of bimetallism standard out of gold was started, money supply was reduced and recession in period has occur.
PERIOD OF 1907 T0 1908:
During this period an out flow of gold has started money supply has reduced, many banks were close down public demand to hold more currency in cash form so, banks go on failing .the tailing of banking system lead congress for the creation of central financial authority (F. R .S) .This federal reserve system was a hope for the stability of financial system in economy.
THE PERIOD OF 1920 TO 1921:
During this period country act the inflation during the world war first (F.R.A) raise the rate of discount 4.75% to 6% and then 7% in him, 1920. This produce decline in money supply of 5% and industrial product index was reduce from 10010 124% in 1921.in this way the depression during this period was due to monetary mismanagement.
FROM 1929 TO 1933
During this period a stock market crash in Oct 1929 in disband berg, let the whole economy towards a major depression. Banks and financial institution was close down. by Nov 1930 to 56 banks were close down and their number was raised to 352 by Dec 1930.policy of (FRS)also work responsible for the failure of finance market in this way according to tried man the major depression of 1929 to 1933 was a resulted Of monetary factors.
PERIOD OF 1937 TO 1938
According to Freidman and Schwarz during this contraction of money supply was a result of forces that were UN related to business activities. In this way the monetary contraction caused economic recession during this period.
INFLATION AS A MONETARY PHENOMENA:
In the study of Friedman and Anna Schwan. The peak period in the history of USA during the period 1867 to 1960 have been a result of increase in the growth of money supply.
PERIOD OF 1951 TO 1960
In the study of fried man and Schwarz the rate of inflation during the period of 1951 to 1960 was a result of deficit finance which was equal to 1.46 billion per year but this was raised to 5.2$billion average per year. In this way monetarist regarding inflation are sustained increase in money supply.
THE OBJECTIVES.
MAIN OBJECTIVE.
To examine the relationship between deficit financing and price level in the economy.
SUB-OBJECTIVE.
I. To increase level of national income in UDCS.
II. Alleviation of poverty in the economy.
III. To reduce level unemployment.
IV. To increase Government investment.
V. To establish a new relation between growth rate of money supply and level of national income.
ASSUMPTIONS
1. Labor Forces is fully mobilized in the economy.
2. Government Institution play sensitive role in administration.
3. There is excess stock of agriculture inputs in the country.
4. Present output of Land is not at optimal level.
5. All the irrigation land in country is not cultivated yet.
CONCLUSION
We may use monitory policy as well as fiscal policy to break the bottle neck of economy in an UDC Because there is lack of funds in poor country so these funds may be provided by any one of these policy level of N.I. employment and output will be increase in the economy by using method of deficit Financing.
REFERENCES
1. The economy development and planning by ML JHINGON
2. Macro economy analyses by Edward Shapiro.
3. Economy planning & Development in Pakistan by A.H. Shahid.
4. Exploring forces of economic growth by Garry ever ding.
5. World economic survey O.P.Cvt.P. 26
6. W.A. Lewis italics mine.
7. Capital funds in under develop country by NEVIN
8. All Indian rural credit survey P-220-270
9. Monetary history of USA from 1867 to 1960 by Milton Friedman and Anna stalwarts.
10. The relative. Stability of monetary velocity by Milton Fried man and dived Misleman
11. Business fluctuation JR.HICKS.
ABBREVIATIONS
1.
|
UDCS
|
––
Under Develop Countries.
|
2.
|
F.R.S
|
––
Fardel Reserve System
|
3.
|
K
|
––
Simple Multiplier
|
4.
|
I.B.R.D
|
––
Intl Bank Of Reconstruction And
Development
|
5.
|
IMF
|
––
International Monetary Fund
|
6.
|
GATT
|
––
General Agreement On Trade And Tariff.
|
7.
|
MPC
|
––
Marginal Propensity To Consume
|
8.
|
MPS
|
––
Marginal Propensity To Save
|
9.
|
AD
|
––
Aggregate Demand
|
10.
|
AS
|
––
Aggregate Supply
|
11.
|
NM
|
––
Supply Of Labor Force
|
12.
|
GOVT
|
–
Government
|
.jpg)
){kind=link}
0 Comments