Answer to Question #46210 in Macroeconomics for lida

Question

Economist are generally divided between two camps-those of a monetarist persuasion,and those of a Keynesian persuasion.Both sets of economist advance arguments and models in favour of their perspectives.
1.Outline the differences in arguments of the Monetarists and Keynesians in the following areas: a)money holding
b)effect of money supply growth
2.State any five roles that the Namibian Stock Exchange (NSX) plays in the Namibian economy. 3.graphically Illustrate the Loanable Funds Theory of interest rate determination.
4.Discuss two main differences between the money market and capital market.

Answer 1

1. Keynesianism emphasises the role that fiscal policy can play in stabilising the economy. In particular Keynesian theory suggests that higher government spending in a recession can help the economy recover quicker. Keynesians say it is a mistake to wait for markets to clear like classical economic theory suggests. See more at Keynesian economics
Monetarism emphasises the importance of controlling the money supply to control inflation. Monetarists are generally critical of expansionary fiscal policy arguing that it will cause just inflation or crowding out and therefore not help.
Principles of Keynesianism
-In a recession / liquidity trap, government intervention can stimulate aggregate demand and real output through government borrowing and higher government spending. Therefore Keynesians advocate expansionary fiscal policy in a recession.
-Keynesians reject the theory of crowding out presented by Monetarists. Keynesians say that if there is a sharp rise in private sector borrowing, government spending can offset this decline in spending.
-Paradox of thrift. A key element in Keynesian theory is the idea of a ‘glut’ in savings. Keynes argued in a recession, people responded to the threat of unemployment by increasing saving and reducing their spending. This was a rational choice, but it contributes to an even bigger decline in AD and GDP.
-Keynesians usually believe there is a degree of wage rigidity. In a recession, Keynes said wages may be ‘sticky downward’ as unions resist nominal wage cuts, this can lead to real wage unemployment. Also, in a recession, when an economy has spare capacity, increasing Aggregate demand will have an impact on real output and only minimal effect on the price level.
-Keynesians believe there is often a multiplier effect. This means an initial injection into the circular flow can lead to a bigger final increase in real GDP.
-Generally, Keynesians are more likely to stress the importance of reducing unemployment rather than inflation.
-Keynesians reject real business cycle theories (an idea that the government can have no influence over the economic cycle)
Monetarism
-Monetarists more critical of ability of fiscal policy to stimulate growth in real GDP.
-Monetarists / classical economists believe wages are more flexible and likely to adjust downwards to prevent real wage unemployment
-Monetarists stress the importance of controlling the money supply to keep inflation low.
-Monetarists more likely to place emphasis on reducing inflation than keeping unemployment low.
-Monetarists stress the role of the natural rate of unemployment (supply side unemployment)
Convergence of Keynesianism and Monetarism.
The distinction between Keynesian and monetarists positions is a bit more blurred. For example, many ‘Keynesian’ economists have taken on board ideas of a natural rate of unemployment, in addition to demand deficient unemployment. ‘New Classical’ economists are more likely to accept ideas of rigidities in prices and wages.
2. The Namibian Stock Exchange (NSX) (Afrikaans: Namibiese Effektebeurs; German: Börse Namibia) is the only stock exchange in Namibia. Based in Windhoek, it is one of the largest stock exchanges on the African continent. It has a partnership with JSE in neighbouring South Africa. The NSX is only open on weekdays, and trades continuously from 09:00 to 17:00 (WAT), excluding public holidays. The stock exchange operates under a license from the Namibian non banking financial regulator NAMFISA. The stock exchange is regulated by the Stock Exchanges Control Act (1985 and 1992).
3. According to the Loanable Funds Theory of Interest, the rate of interest is calculated on the basis of demand and supply of loanable funds present in the capital market. The concept formulated by Knut Wicksell, the well-known Swedish economist, is among the most important economic theories.
4. Money market is distinguished from capital market on the basis of the maturity period, credit instruments and the institutions:
1. Maturity Period: The money market deals in the lending and borrowing of short-term finance (i.e., for one year or less), while the capital market deals in the lending and borrowing of long-term finance (i.e., for more than one year).
2. Credit Instruments: The main credit instruments of the money market are call money, collateral loans, acceptances, bills of exchange. On the other hand, the main instruments used in the capital market are stocks, shares, debentures, bonds, securities of the government.
3. Nature of Credit Instruments: The credit instruments dealt with in the capital market are more heterogeneous than those in money market. Some homogeneity of credit instruments is needed for the operation of financial markets. Too much diversity creates problems for the investors.
4. Institutions: Important institutions operating in the' money market are central banks, commercial banks, acceptance houses, nonbank financial institutions, bill brokers, etc. Important institutions of the capital market are stock exchanges, commercial banks and nonbank institutions, such as insurance companies, mortgage banks, building societies, etc.
5. Purpose of Loan: The money market meets the short-term credit needs of business; it provides working capital to the industrialists. The capital market, on the other hand, caters the long-term credit needs of the industrialists and provides fixed capital to buy land, machinery, etc.
6. Risk: The degree of risk is small in the money market. The risk is much greater in capital market. The maturity of one year or less gives little time for a default to occur, so the risk is minimised. Risk varies both in degree and nature throughout the capital market.
7. Basic Role: The basic role of money market is that of liquidity adjustment. The basic role of capital market is that of putting capital to work, preferably to long-term, secure and productive employment.
8. Relation with Central Bank: The money market is closely and directly linked with central bank of the country. The capital market feels central bank's influence, but mainly indirectly and through the money market.
9. Market Regulation: In the money market, commercial banks are closely regulated. In the capital market, the institutions are not much regulated.