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TSR Wiki > Study Help > Subjects and Revision > Revision Notes > Economics > Monetarism and Keynsianism

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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 Reduces competitiveness
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

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