Transcript File
A Keynes vs Monetarist view
Looks at the role that
fiscal policy can play
in stabilizing the economy.
Keynesian theory suggests that higher government
spending in a recession can help the economy
recover quicker.
Keynesians say it is a mistake to wait for markets to
clear like classical economic theory suggests
In a recession, people
responded to the threat of
unemployment by
increasing saving
&
reducing spending
RECESSION
Government
intervention
STIMULATES AD and REAL GDP
What about
Policy Tools?
Which ones can be
used to stimulate AD
Wages may be ‘sticky downward’/ inflexible’
Workers do not accept nominal wage
cuts,
Firms have to lay off workers
This can lead to
involuntary unemployment.
The economy slows down
In a recession,
an economy has spare capacity,
SO:
increasing AD will have an impact on
real output and only minimal effect on
the price level.
INCREASE SPENDING
(C
+ I + G + X – M).
Keynesians believe
there is a multiplier effect
This means
an initial injection (eg increased government spending)
into the circular flow can lead to a bigger final increase in
real GDP
“It is more important to
reduce unemployment
than inflation”
Keynesians support expansionary fiscal policy
in a recession.
Keynesians reject real
business cycle theories
(an idea that the government can have no influence
over the economic cycle)
WHAT
does this
mean???
The economy is naturally stable.
• Markets work well when left to themselves.
• Government interference can weaken the economy
• Fiscal Policy is often bad policy.
• A small role for government is good.
Monetarists stress the importance of
controlling the money
supply to keep inflation low
Focus on MONETARY POLICY TOOLS which
increase or decrease the supply of money and
credit.
MV=PQ
IN THE SHORT RUN velocity is stable. This implies that in
the short run, changes in the money supply are the
dominant forces that change nominal GDP.
MV=PQ)
IN THE LONG RUN the economy is at potential
output, so changes in the money supply only
lead to higher prices, not higher output
SHORT RUN?
LONG RUN?
SHOW THE DIFFENCE BY DRAWING THE AD/AS GRAPHS.
Monetarists stress the role of the natural rate
of unemployment (supply side
unemployment)
say … “REDUCE INFLATION”
Monetarists more likely to
place emphasis on
reducing inflation than
keeping unemployment low
MONETARISTS
"Inflation is always and everywhere
a monetary phenomenon."
KEYNESIAN
REGULATOR?
POLICY ?
POLICY TOOLS?
AD?
AS?
GRAPH(S)
MONETARIST