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Business Stabilization - Essay Example

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The fundamental theories of money revolve around the classical, Keynesian and monetarists points of view. It can be said however that these theories are Bi-Polar in nature when monetarism is viewed as a modification of the classical theory of money. Lord John Maynard Keynes who recommended the use of Government Revenue and spending to help control the economy otherwise know as fiscal policy authored the Keynesian theory of money…
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Business Stabilization

Download file to see previous pages... This postulation highlights the disjoint and independence in supply and demand based on time and persons. This is a sharp contrast to the view of the classical monetarist who did not take into consideration the possibility of a time lag in-between earning and expenditure and the savings culture. This was the starting point for Keynesian Economics. As stated earlier, fiscal policy is of more importance than monetary policy in the view of Keynesian Economist. Keynesians believe that money is an asset which can be held for its own sake and not just as a temporal abode of purchasing power. Keynesians do no believe that changes in money supply have significant effects on economic activities. Keynesianism also does not reckon with the classical belief that money can be routed to affect economic activities. Although it will be an overstatement to say that Keynesianism does not recognize money as being important, it should however be put in proper perspective. Money does not have a direct impact on the economy. Before money can be said to have an impact on the economy, Keynesians believe that a change in money supply should influence interest rate which should in turn translate into a change in investment levels and ultimately have an effect on national income, only then can money be said to matter.

Rate of Ms1 Rate of Net Ms= Money Supply
Interest Ms2 interest Md = Money demand
r1 r1
r2 r2
M1 M2 Ms Md r3
b Investment

Going by the graphical illustration above, It is readily observable that, lowering the interest rate will have no impact on an inelastic investment curve. Keynesians also believe that the primary link between money supply and the economy is interest rate with two other secondary link of the ability of the interest rate to affect investments and for changes in investments to affect national income these links according to Keynesianism are very weak.

Politicians in the UK in the course of electioneering and campaign exhibit vast knowledge of Keynesianism with the way Economic policies are drawn up. The two main parties in the UK today are the Conservative and Labour parties, each having their traditional viewpoint on economic policies and how the Government is expected to intervene in the economy. However, in the post war period, there has been cross-party consensus as regards economic policy with very great inclination of both the left and the right towards Keynesianism. There has equally been much talk from both sides on how best to manipulate the financial operations of the Government with a view to furthering certain economic policy objectives. These objectives include price stability, external equilibrium, economic development and growth, income distribution etc. instruments of fiscal policy such as tax, Government expenditure and interest rates are ideas that have been propagated in the quest to achieve the afore-mentioned objectives. The belief is that by fine-tuning the fiscal policy, depression within an economy can be overcome. Both the labour and conservative party agreed that some key industries should be owned by the state in a process of nationalization. However ...Download file to see next pagesRead More
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