Economics for a Beginning Student (110

UNIT 4

Pre-reading task

I.Answer the questions.

1.Uncertainty about inflation rates imposes different kinds of costs. How important may the psychic costs be?

2.How many ways of dealing with inflation are there?

II.Read Text 1.

Incomes Policies (Text 1)

Incomes policy is the attempt to influence wages and other incomes directly. Suppose the government wishes to get inflation down from 10 per cent to 5 per cent. If, by explicit legislation or implicit pressure, it can persuade everyone to seek wage increases of only 5 per cent, price inflation will quickly fall to 5 per cent. If this transition happens quickly enough, real wages need not suffer.

It is commonly said, and essentially correct, that all previous attempts at incomes policy have been a failure, at best lasting for a short time before a new explosion of wages and prices took place. However, this need not be inevitable. We discuss several reasons why past incomes policies have been unsuccessful.

First, while governments have been in the business of direct intervention in the labour market, they have often been unable to resist pursuing other aims. For example, in the UK in the 1970s the Labour government tried to reduce the differential between high-wage jobs and low-wage jobs by adopting an incomes policy that allowed an absolute rather than a percentage increase: £6 a week means much more to a worker getting £40 a week than to a worker getting £100 a week. By changing relative wages and real wages, such policies alter real wages from their equilibrium levels, lead to excess supply in some skills and excess demand in others, and set up pressures to circumvent or break the policy.

21

But it is possible to introduce incomes policies whose function is to reduce nominal wage increases and inflation without attempting to tinker with real wages.

Second, we have suggested incomes policy as a temporary adjustment device. In the long run, slow nominal money growth is essential if low inflation is to be maintained. Some incomes policies have failed because governments hoped that long-term incomes policy could hold down money wages and prices even though nominal money was still growing at a rapid rate. Since real aggregate demand then quickly expands, wages and prices have to rise to reduce aggregate demand to its full employment level again.

Similarly, long-term incomes policies are hard to administer in a world where equilibrium real wages for particular skills are changing over time. Freezing the existing wage structure by awarding everyone an equal cost-of-living wage increase will gradually set up powerful market forces of excess supply and excess demand.

These three important sources of past breakdowns in incomes policy might not apply if the policy were known to be a temporary device to speed up the adjustment of wages to an underlying change in nominal money growth that was widely believed to be permanent.

Tax-based Incomes Policy (TIP). Some economists have begun to advocate a new form of incomes policy, which would be based not on direct legislation to control wage settlements but on tax incentives. Suppose the government wanted to reduce inflation from 10 per cent to 5 per cent. It could allow firms and workers to reach whatever bargains they liked, subject to the following rule: for each 1 per cent wage increase in excess of the government guide of 5 per cent, firms would have to pay, say, 2 per cent to the government in higher taxes.

If the government then paid out this revenue equally to firms, firms as a whole would not lose. But those firms that paid high wage increases would be net losers and those that managed to hold wages below the average increase

22

would be net gainers. Thus, it is argued, firms would have powerful incentives to try to hold down wage settlements.

As yet this remains untested. In the United States the Carter administration tried unsuccessfully to get Congress to adopt the proposal. In the UK the TIP has been strongly advocated by Professor Richard Layard of the London School of Economics. But since it has not yet been tried out in practice, it is hard to say whether it would be more successful than previous approaches to incomes policy.

III. Answer the following questions:

1.Might income policies temporarily or in the long run speed the transition to a lower inflation rate?

2.Why could income policies succeed in the long run? Give your reasons.

IV. Check up the pronunciation of the unfamiliar words in a dictionary and read Text 2 aloud.

Incomes Policies (Text 2)

1. Incomes policy is the attempt to influence wages and other incomes directly. 2. Suppose the government wishes to get inflation down from 10 per cent to 5 per cent. 3. The government can persuade everyone to seek wage increases of only 5 per cent. 4. Price inflation will quickly fall to 5 per cent. 5. All previous attempts at incomes policy have been a failure. 6. In the UK in the 1970s the Labour government tried to reduce the differential between high-wage jobs and low-wage jobs. 7. The government adopted a certain incomes policy. 8. It allowed an absolute rather than a percentage increase. 9. But it is possible to introduce different incomes policies. 10. Their function is to reduce nominal wage increases and inflation.11. The reduction is possible without attempting to tinker with real wages. 12. We have suggested incomes policy as a temporary adjustment device. 13. As a result some incomes

23

policies have failed. 14. Similarly, long-term incomes policies are hard to administer. 15. The fact is that equilibrium real wages for particular skills are changing over time. 16. Freezing the existing wage structure will set up certain market forces. 17. Excess supply and excess demand are inevitable. 18. Some economists advocate a new form of incomes policy. 19. It would be based on tax incentives. 20. Thus, it is argued, firms would have incentives to hold down wage settlements. 21. As yet this remains untested. 22 The proposal has not been tried out in practice.

V.Write out from Text 2 the English equivalents for the following words and

expressions:

1.политика регулирования доходов, попытка, влиять, непосредственно;

2.предполагать, желание правительства, спуститься; 3. правительство, убеждать, стремиться, увеличение зарплаты; 4. инфляция цен, быстро падать; 5. предыдущие попытки, неудача; 6. лейбористское правительство, пытаться, уменьшить, разница в оплате, высокооплачиваемая работа, низкооплачиваемая работа; 7. принимать; 8. разрешать, абсолютный, скорее чем, частичное увеличение; 9. возможный, ввести, другой; 10. функция, уменьшить, увеличение номинальной заработной платы; 11. уменьшение, чинить на скорую руку; 12. предлагать, средство временного регулирования; 13. в результате, потерпеть неудачу; 14. подобным образом, долгосрочная политика регулирования доходов, трудный, управлять; 15. сбалан-

сированная реальная плата, определенные умения, в течение времени; 16. замораживание, существующая структура зарплаты, зд. создавать рыночные силы; 17. повышенное предложение и повышенный спрос, неизбежный; 18. экономист, поддерживать; 19. основывать, налоговые стимулы; 20. утверждать, держать в подчинении, соглашение о ставках заработ-

24

ной платы и решение об их изменении; 21. до сих пор, оставаться непроверенным; 22 предложение, подвергать испытанию.

VI. Translate Text 2 into Russian (in writing).

VII. Translate the Russian version of Text 2 into English (orally).

VIII.Make up meaningful phrases with the following:

1. incomes policy, to be the attempt to influence, directly; 2. to suppose, the government, to get inflation down; 3. the government, can persuade, to seek wage increases; 4. price inflation, to fall; 5. all previous attempts, to be a failure; 6. the Labour government, to try to reduce, the differential; 7. the government, to adopt; 8. it, to allow, absolute increase, percentage increase; 9. it, to be possible, to introduce, different; 10. the function, to be, to reduce, increases; 11. the reduction, to be possible, without attempting, to tinker; 12. we, to suggest, as, a temporary adjustment device; 13. some income policies, to fail; 14. long-term income policies, to be hard, to administer; 15. equilibrium real wages, to change over time; 16. freezing, the existing wage structure, to set up; 17. excess supply and excess demand, to be inevitable; 18. some economists, to advocate; 19. it, to be based, incentives; 20. it, to be argued, firms, to have incentives, to hold down; 21. this, to remain; 22. the proposal, not to be tried out.

IX. Replace the Russian words and expressions with their English equivalents.

1. Incomes policies is (попытка) to influence wages and other incomes directly. 2 All (предыдущий) attempts at incomes policy have been a failure. 3. In the UK in the 1970s the Labour government tried (уменьшить) the differential between high-wage jobs and low-wage jobs. 4. It (позволить) an absolute rather than a percentage increase. 5. But it is (возможный) to introduce different in-

25

comes policies. 6. We have suggested incomes policy (как временный) adjustment device. 7. As a result some incomes policies (потерпеть неудачу). 8. (Подобным образом) long-term incomes policies are hard to administer. 9. (Замораживание) the existing wage structure will set up certain market forces. 10. Some (экономисты) advocate a new form of incomes policy. 11. It would be based on tax (стимулы). 12. As yet this (остается) untested. 13. (Предложение) has not yet been tried out in practice.

X.Summarize in 10 sentences the contents of Text 1.

XI. Translate into Russian the fourth paragraph of Text 1.

XII. Try to express the main idea of the text in three sentences. The following words will help you:

1.Incomes policies, might speed, temporarily, the transition, a lower inflation rate.

2.But, they, to be unlikely, to succeed in the long run.

3.Low money growth, to be necessary, for low inflation, in the long run.

UNIT 5

Pre-reading task

I.Answer the following questions:

1.What measures to get inflation down are possible besides incomes policy?

2.What do you know about controlling the Central Bank and the banking system?

26

II.Read Text 1.

Institutional and Constitutional Reform (Text 1)

This approach takes a long run view. It is concerned not with the temporary costs of first getting inflation down, but with how to keep inflation down.

Controlling the Central Bank. The first suggestion is to pass a law permanently restricting the rate of nominal money growth to, say, 4 per cent a year. Why 4 per cent? Because in the long run technical progress and a higher capital stock increase potential output and real income; hence the demand for real money balances increases and the nominal money stock can be expanded a little even if prices remain constant. The exact rate at which the nominal money supply could grow without putting upward pressure on prices in the long run is probably somewhere between 2 and 4 per cent.

The point of this suggestion is to limit the government’s freedom to act. Just before elections, governments have a habit of increasing the money supply. With sluggish price and wage adjustment, this buys a temporary output boom near election day, though in the long run the only consequence is higher prices. Strict regulation of the central bank, it is argued, would remove the temptation and prevent spurts of money growth and inflation around election time. It would also increase the credibility of tight monetary policy in the long run. Workers would know that higher wages would not be accommodated by higher nominal money, and so their effect would be to reduce aggregate demand and increase unemployment until wages fell back into line with the nominal money supply again.

Controlling the Bank System. We argued that the commercial banks have some flexibility in creating deposits and money. Even if the central bank keeps a tight rein on cash (high-powered money), banks may try to get by with lower cash reserves and so create extra deposits, the major component of the money supply. A higher nominal money supply may not be entirely the government’s fault. How could government control be increased?

27

One proposal is to force the banks to have a 100 per cent cash reserve ration. Banks could issue chequing accounts only if they had the cash in the vaults to back them. Since the government controls the supply of cash, it would control the money supply exactly. Surely this means there would be a huge drop in the money supply? No. The government would simply print a lot of extra money on a once-off basis. This money would have to be held by the banks in order for them to maintain their deposits at the existing level. Thereafter, the government would have the money supply under control.

This proposal would take banks out of the lending business. It is because bank’s assets are not merely cash but also loans and market securities that the corresponding deposit liabilities are not entirely backed by cash. Although this proposal would perfectly control one particular measure of the money supply, new institutions would arise to take over the banks’ existing lending business. And the credit that these new institutions provided would start to supplant wider measures of money and would influence both interest rates and consumption and investment behaviour. It would then become important to control these new institutions. This proposal merely redefines the problem under a different name.

III. Answer the following questions:

1.What is the approach concerned with?

2.Why would the proposal (about a 100 percent cash reserve ratio) take banks out of the lending business?

IV. Check up the pronunciation of unfamiliar words in a dictionary and read Text 2 aloud.

Institutional and Constitutional Reform (Text 2)

1. This approach takes a long run view. 2. It is necessary to restrict the rate of nominal money growth to, say, 4 per cent a year. 3. The fact is that the nominal money supply could grow without putting upward pressure on prices in

28

the long run. 4. Then the exact rate is between 2 and 4 per cent. 5. We must limit the government freedom to act. 6. Just before elections, governments increase the money supply. 7. In the long run the only consequence is higher prices. 8. Regulation of the central bank would prevent spurts of money growth and inflation around election time. 9. It would also increase the credibility of tight monetary policy in the long run. 10. The commercial banks have some flexibility in creating deposits and money. 11. Banks may try to get by with lower cash reserves. 12. They may try to create extra deposits. 13. A higher nominal money supply may not be entirely the government’s fault. 14. Government control could be increased. 15. The banks must have a 100 per cent cash reserve ration. 16. The government controls the supply of cash and the money supply. 17. The huge drop in the money supply may be escaped. 18. New institutions would arise to take over the banks’ existing lending business. 19. These new institutions would provide a certain credit. 20. The credit would influence both interest rates and consumption and investment behaviour. 21. It would then become important to control these new institutions.

V.Write out from Text 2 English equivalents for the following words and ex-

pressions:

1. подход, смотреть на что-либо; 2. необходимый, ограничивать, темпы роста номинальных денег; 3. запас номинальных денег, оказывать давление, направленный вверх; 4. темпы роста, между 2 и 4 процентами; 5. ограничивать, свобода, действовать; 6. именно, выборы, увеличивать, запас денег; 7. единственное последствие; 8. регуляция, предотвратить, рывок, незадолго до выборов; 9. увеличивать, вероятность, жесткая монетарная политика; 10. коммерческий, гибкость, создавать, вклады; 11. пытаться, подняться, наличные резервы; 12. создать, специальный вклад; 13. полностью, вина; 14. контроль; 15. кассовая наличность; 16. денежная масса; 17. огромное падение, избежать; 18. учреждение, возникать, принимать на

29

себя, лендинг-бизнес; 19. обеспечивать, определенный кредит; 20. влиять, как, так и, процентные ставки, потребление, инвестиционное поведение; 21. становиться, контролировать.

VI. Translate Text 2 into Russian (in writing).

VII. Translate Text 2 from Russian into English (orally).

VIII.Make up meaningful phrases with the following:

1. this approach, to take a view; 2. it, to be necessary, to restrict, nominal money growth; 3. the nominal money supply, to grow without, pressure on prices; 4. then, the exact rate, to be; 5. we, to limit, to act; 6. the only consequence, to be; 8. regulation of the central bank, to prevent, money growth, election time; 9. it, to increase, the credibility, monetary policy; 10. the commercial banks, to have some flexibility, in creating; 11. banks, to get by, cash reserves; 12. they, to try, to create; 13. a high supply, not to be, entirely; 14. government control, to be increased; 15. the banks, to have, cash reserve ratio; 16. the government, to control, the supply of cash; 17. the huge drop, the money supply, to be escaped; 18. new institutions, to arise, to take over, lending business; 19. new institutions, to provide; 20. the credit, to influence, both …. and, interest rates, behaviour; 21. it, to become important, to control.

IX. Replace the Russian words and expressions with their English equivalents.

1. Institutional and constitutional reform (смотреть далеко вперед). 2. First of all it is necessary (ограничить) the rate of nominal money growth to, say, 4 per cent. 3. We must limit the government freedom (действовать). 4. Just before (выборы) governments increase the money supply. 5. Regulation of the central

30