II. Give English equivalents of the following:

BiflHOCHa e4)eKTMBHicTb craBKa eiflcOTKa

4)iHaHCOBO-6K)fi>KeTHoT Ta flosrocrpoKOBa nonirwKa

rpoujOBo-KpeflMTHoV noniTkKw MOwnnsicTt nporno3yBaHHH

THMfacoBi 3MiMM b floxoflax eKOHOMNwe cepefloanuae

ypnAOBi TpaHccfsepTMi BiinnaTn cTMMynnu,iHHi 3axoAH

cnafl BMpo6Hnu,TBa noflamoBa noniTMKa

III. Fill in the blanks with appropriate words:

increase

does not respond

a boom

temporary

demand

increases

output

expenditures

recovery

tax change

1. The relative effectiveness of fiscal and monetary policies depends on the interest elasticities of investment demand and money ... .

2. The response of the demand for mo­ney to a change in the level of real ... is also important to stabilization policy.

3. With a ... tax cut, individuals should expect lower disposable income in the future because taxes will ... after that.

4. To offset changes in desired invest­ment requires a relatively large ....

5. Consumption ... fully to changes in income.

6. An automatic stabilizer is an expendi­ture law or tax law that automatically increases ... when an economy enters a recession.

7. Government transfer payments automa­tically increase during a recession and automatically decrease during ... or ... .

IV. Read and translate the text:

It is important to remember that the crucial issue for stabilization policy is whether an economy moves toward full employment quite rapidly or quite slowly. In short, the important question for much of macroeconomics is: How long is the long run?

Even if stabilization policies were useful because they could move the economy toward full employment or stabilize prices more quickly than the economy would of its own accord, there remains an important policy issue: What is the best way to stabilize the economy — with activist, countercyclical monetary and fiscal policies or with nonactivist, rules-directed monetary and fiscal policies?

The relative effectiveness of fiscal and monetary policies depends in part on how sensitive desired investment and the demand for money are to interest-rate changes or, in the jargon of economics, on the interest elasticities of investment demand and money demand.

Obviously appropriate fiscal policy will be relatively more effective if stimulative policies do not affect interest rates by

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much or if interest rates do not affect investment by much (that is, if crowding out does not occur).

Monetary policy will be less effective if either the demand for money is inelastic with respect to the interest rate or if desired investment is inelastic with respect to the interest rate.

The response of the demand for money to a change in the level of real output is also important to stabilization policy. Long-term monetary policies will be affected by the income elasticity of demand for real money balances and price-level elasticity of demand for nominal money balances. Because individuals use saving as a way of smoothing consumption relative to changes in income, temporary changes in income will not necessarily result in consumption changes of equal size. This poses a se­rious problem for fiscal policy. If a fax change, say a tax cut de­signed to stimulate aggregate demand, is perceived as temporary, individuals might increase consumption somewhat but are more likely increase their saving in order to smooth consumption. Why? With a temporary tax cut, individuals should expect lower disposable income in the future because taxes will increase after the temporary fax cut. Consumption does not respond fully to changes in income. To offset changes in desired investment which would otherwise lead to a change in aggregate demand, then, requires a relatively large tax change. In addition if the tax change is viewed as temporary, consumption may not change.

Temporary change in tax policy will not affect consumption much since consumption is determined by expectations about income over a long period of time.

An automatic stabilizer is an expenditure law or tax law that automatically increases expenditures (or decreases taxes) when an economy enters a recession, and automatically decreases expenditures {or increases taxes) when an economy enters a period o( inflation.

A second source of macroeconomic stability is the relative stability of government expenditures through economic cycles. While investment and, to some degree, consumption expenditures rise and fall with the economic cycle, the relative stability of government expenditures means that these expenditures become relatively more important during recessions and relatively less important during booms.

A third source of macroeconomic stability is the govern­ment's transfer system. During a recession, individuals automa­tically qualify for welfare and unemployment compensation should they become unemployed. Since more people are beco­ming unemployed during a recession, government's transfer

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payments increase. Conversely, during a recovery or a boom when the unemployment rate decreases, so do unemployment and some transfer payments.

Government transfer payments automatically increase during a recession and automatically decrease during a recovery or boom, thereby automatically stabilizing the economy.

An important reason for rule-governed policy is that expec­tations about policy responses can influence how a policy affects an economy. Predictability is important in efficiently organizing economic activity and the inconsistency of expectations with the actual policies pursued will create a less predictable economic environment.