TSR Wiki > Study Help > Subjects and Revision > Revision Notes > Economics > Monetarism and Keynsianism
| Issue | Keynesianism | Monetarism
|
| Phillips curve
| Unit elasticity causing a payoff between unemployment and inflation
| Vertical long-run Phillips curve (completely inelastic) - explains stagflation
|
| Savings
| Savings lower AD, causing less investment (despite cheaper loans)
| .
|
| Quantity theory of money
| Wrong because not all the extra money is spent - velocity is may slow down.
| MV = PT
- M is the supply of money
- V is the velocity of transactions
- P is the average price
- T is the total number of transactions
V is believed to be constant. Therefore increasing M increases prices, output and employment.
|
| Conclusions
| .
| 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 wages have adjusted.
|
| Causes of inflation
| AD being expanded for too long at too fast a rate.
| In the long run, higher demand leads to increased inflation.
|
| Effects of inflation
| .
| *Damaging to business
|
| Labour market/unemployment
| Sticky wages - when the price level rises, real wages fall, thus allowing firms to hire more workers. This increases output. Hysteresis - high levels of unemployment embedded in the economy because of a deficiency of AD, firms respond by hiring fewer people.
| Unemployment will move towards the natural level in the long run
|
| Solutions to unemployment
| .
| In the short run, increase AD. Long run, increase the mobility of labour through training and a reduction in unemployment benefit.
|
| Government policy
| Maintain high level of stable AD. Control interest rates and exchange rates to reduce uncertainty. Cooperation between industry and government.
| Little intervention, except for controlling the money supply. Well-publicised targets to reduce expectations of unemployment.
|
| Effect of increased government spending
| 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 they suggest
| They cannot explain stagflation
|
Comments
How does a vertical LRPC explain stagflation which is rising unemployment and rising inflation?
