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ECO100Y1 (431)
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Structuralist vs Monetarist, Benefits from Education

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University of Toronto St. George
Jack Carr

Jan 21, ECO 324 Structuralist argue that inflation is a policy instrument because of shortages- inelasticities, food, foreign exchange, tax revenue Solution-price rise, limited inflation-30% per annum to promote higher investment, economic growth Monetarist-Industrial country(US policy), similar to Washington Consensus -The only valid way we have to preconditions for successful eco growth is a control on inflation-5%, small federal deficit that is manageable -balance of payments, foreign exchange rate stable Monetarists Criticism of structuralist -claim that structuralist program has faults: -balance of payments problem -inflation raise price of exports, balance of payment problem, solved by devaluation-raise price of imports -generates undesirable short run investment activities-scarce material, hoarding, luxury housing, distortion in investments -inflation discourages saving, encourages capital flight(take financial assets out of the country) -inflation raises risk, all forms of domesticforeign investment, not sure what wages are, entrepreneurs cancel plans to invest due to risk -inflation discourages resource allocation -how to stop inflation at 25-30%, how to stop it from rising, runaway inflation Reading 7.3, Kirkpatrick -}K[-76, industrial country avg inflation of 7%, developing country-avg 14% -}K[-86, industrial country avg inflation 4%, developing country-avg 20% -K] }o]L[7]Lo]}LZ }KK}L]Lo]LK] Monetarist argue that when monetary expansion is used, it will not solve foreign imbalances There can be other source of inflation imported into country, external shocks in foreign country [-OPEC raised prices, country had to use a lot of foreign exchange to get the oil Z-76-world recession problem, trade in this period is usually north south, (industrial, developing }L]Z7Zo}]L }K }L[Z}]ZL ]}L} }2}Z}]LZ]o }L]Z7ZL industrial countries do good, export increase Curbing inflation means that interest rate rose to double digits, latin American countries had to meet debt, have to pay much more interest payments, devaluation ]L[LZK Z}K}ZZZ}Z]Z}oZ Channels for importing inflation form other countries -imported goods at higher prices-petroleum cost is higher -imported services, interest rates rising in the period of eighties strongly, more foreign exchange for same international obligation -international borrowing increases money supply, generates inflation -rise in exports, more income into country, higher income, higher money supply, more inflation
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