Neo-Keynesianism

Whereas classical (and neo-classical) economic theory assumes prices and wages to be flexible enough to eliminate excess supply or demand, Keynesians (today often called neo-Keynesians) argue that wages are inflexible or 'sticky' because of labour union contracts, government regulation, and so on. Furthermore, businesses cannot change their prices too frequently, because they do not have perfect information, and because there are many costs involved. These are sometimes known as 'menu costs', drawing on the example of restaurateurs who cannot afford to print menus with new prices every day according to small fluctuations in demand.

Neo-Keynesians still maintain that because individuals and firms are unable to find

the right prices that would lead the economy to rising output and high or full (10)___________

economies can get locked into disequilibriums for long periods. Thus unlike the monetarists, who insist that free markets and competition are efficient and should be allowed to operate with a minimum of governmental intervention, Keynesians believe there is still a role for either expansionary or deflationary government policies.

B. Comprehension. Answer the following questions.

1. According to Keynes, what might provoke a high-unemployment equilibrium?

2. According to classical theory, what will happen if people save a lot of money?

3. Keynesian policy is often described as 'demand management'. What does this mean?

PART I. ECONOMICS

4. According to Keynes, what is the economic effect of even a small increase in government spending?

5. What do monetarists mean by 'the neutrality of money'?

6. According to classical theory, what will bring about the end of a recession?

7 What is the monetarist or neo-classical objection to government intervention? 8. According to neo-Keynesians, why do prices and wages not adapt as classical theory says they will?

IV Business Trends. Here is a range of vocabulary available to describe and interpret movements in graphs, bar charts and other visual data. Group the words below under the appropriate heading:

rise, peak, level out, plummet, grow, bottom, remain stable/steady, plunge, increase, improve, decline, go up, decrease, accelerate, drop, fluctuate, fall, pick up, jump, recover, shoot up, stabilize

Move up	Move down	Move in various directions	No change

V Visual Aids. Pictures often help to make information clearer. A. Label the following using words from the box.

pie chart	table	flow chart	map
histogram/bar graph	segment	row	diagram
column	plan	picture	line graph

UNIT 10. BUSINESS CYCLE AND BUSINESS TRENDS 57

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u. Match the words from the box with the correct letters in the pictures.

broken line vertical axis

undulating line solid line

horizontal axis dotted line

curve fluctuating line

VI. Describing trends. Read the statements about foreign exchange movements, then replace the words in italic with synonyms from the box.

volatile	a slight recovery	bearish	bullish	unpredictable
outperformed	picked up	peaked	slipped	fluctuated
sluggish	subdued	plummeted	firmed up	remained constant

1. Sterling has been rather susceptible to sudden change recently.

2. The Deutschmark showed some improvement on Friday.

3. The yen has made more progress than most European currencies this year.

4. The market makers have been rather aggressive in their buying this morning.

5. Pound trading was thin in Frankfurt yesterday.

6. Cocoa prices reached a high point at midday.

7. Trading of softs was very slow last week.

8. On Wall Street, leading stocks became stronger last month.

9. Silver prices plunged yesterday, closing, 14 pence below the previous close.

10. The dollar moved up and down in London last week.

11. Share prices slid slightly after the resignation of the Chairman.

12. Commodity prices were erratic last week.

13. The level of inflation stayed the same during 1993.

14. Commodities trading improved yesterday after a slow start.

15. A quiet, low trade volume options market was forecast.

VII. The Language of Graphs. Match the terminology in the box with the points on the graph below.

vertical axis	horizontal axis	bullish market	peak
slump	fluctuations	upward trend	rise
downward trend	bearish market	remain constant	units
stand at	level off	reach a low	fall
curve	drop

PART I. ECONOMICS

VIII. Use words and expressions from exercises IV - VII to describe changes of the economic activity shown on Figure 1.

IX. Express your attitude towards the following proverbs and sayings.

• Penny-wise and pound-foolish.

• Prosperity makes friends, and adversity tries them.

• Time is money.

• To lay by for a rainy day.

• Waste not, want not.

X. Writing Practice. Make a short summary about business cycle from the above text. Use the opening phrases from Appendix 1.

UNIT 10. BUSINESS CYCLE AND BUSINESS TRENDS

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