Monetarism and Keynsianism
Bookmark this page

Issue	Keynesianians	Monetarists
General Theory	Phillips Curve     Unit elasticity – Pay off between unemployment and inflation   Labour Market – Do not clear. Disequilibrium can persist and mass U can continue. (Wages are sticky downwards. If wages are cut, AD falls, and demand deficient (dis-equilibrium) employment can follow. Less wages, less demand. Less production. Less labour. Less demand. Employers, despite cheaper labour, are unlikely to employ more labour as there is a lack of demand). Savings – do not stimulate investment and growth. Less AD, therefore less investment, despite cheaper loans.   Quantity theory of money – Wrong. Not all extra money spent, Velocity of circulation may slow down. Increases in money supply may lead to real increases in output.	Phillips Curve     Completely inelastic – Increase inflation leads to increase in unemployment         Offered explanation for stagflation.     MV = PT (Quantity theory of money)   M= Supply of Money V= Velocity of Transactions P= Average Price of Transactions T=Total Number of Transactions   V and T are independently determined – therefore an increase in M must mean an increase in Prices (or an increase in money supply will lead to inflation)
Conclusions From Theory	See governmental policy	If money supply rises, the rise in aggregate demand will lead to higher prices, output and employment. But soon expectations will adjust; and people will expect higher prices and wages – thus prices will rise. If aggregate demand and money supply rise again, inflation will just get higher.   Reducing the rate of growth of the money supply will reduce inflation without leading to long-term unemployment. It will lead to short-term unemployment, until prices and wages have adjusted. This will persist if prices remain sticky through unions and firms expecting high inflation rates.
Causes of Inflation	Aggregate demand being expanded for too long at too fast a rate.	Entirely dependent on aggregate demand, which is entirely dependent on money supply. Higher demand in the long run leads to increased inflation. In short run, increasing aggregate demand will lead to an increase in employment below natural level. After expectations have adjusted, fall back to the natural level.
Effects of Inflation		Damaging to business (uncertainty) Reduces competitiveness
Unemployment	Deficiency of aggregate demand Aggregate supply highly elastic downwards in response to a reduction in aggregate demand. Firms respond by employing fewer people.   Structural Problems – Shift from and to different types of industry   Hysteresis – Where high levels of unemployment are embedded in an economy / persistence of unemployment when deficiency of demand has been removed, due to -          Due to Low Capital Stock -          Deskilling -          Insiders (holding on to jobs) -          Working people harder not employing more -          Caution	Will move towards a natural level (Un) in the long run. Never any disequilibrium unemployment in the long run. Equilibrium unemployment consists of -          Frictional -          Structural -          Technological
Solutions to Unemployment		Raising aggregate demand (only in short run) Increase mobility of labour -          Training -          Reduction of unemployment benefit So that natural level of unemployment can be reached
Governmental Policy	-          Maintain a high level of stable aggregate demand -          Control exchange and interest rates (to reduce uncertainties) -          Cooperation between industry and government (promote good industry and stability) -          Structural policies (regional and urban policies)	-          Intervene in money supply -          Little other government intervention (no supply side policies) -          Modest and well-publicised targets will help should reduce expectations of inflation.
Crowding out	Multiplier	-          Crowding out
Taxation	Good	-          Bad. Incentives better
Thinks the other side is wrong because:	They put too much reliance on markets – more complex than mere mechanisms	Keynesianism failed to explain Stagflation. Our theory does.

Other Notes in this Category

1. Formulae
2. Inflation
3. Monetarism and Keynsianism
4. Resource Allocation in the Market
5. The Concept of Price

Didn't find this useful?

• Visit Coursework.Info for over 14,000 GCSE, A-Level and University Essays