Monetarist verses Keynesian views

Ellie4

I just found this on my syllabus. I know vaguely what it means, but can anyone elaborate on it for me? :smile:

Thankiiiiiies!

Reply 1

S1M

Ellie4

I just found this on my syllabus. I know vaguely what it means, but can anyone elaborate on it for me? :smile:

Thankiiiiiies!

Complete elaboration of this would be very long...

Brief Summary of my understanding of the top of my head:
MAIN POINT: They each believe the AD/AS diagrams are different. Keynesian have backwards shaped L curve for the LRAS
Keynesians believe monetary policy is a ineffective tool of AD management.
Keynesians believe fiscal policy is a effective tool of AD management.
Monetarists believe opposite. This due to monetarists thinking that the IS curve (the output at which the good market is in equilibrium with interest rates) is elastic and the LM curve (the output at which the money market is in equilibrium with interest rates) is inelastic. Keynesians argue the opposite. Hence, subsequent changes in the monetary policy have little effect on investment (as keynesians argues this to be inelastic) and hence AD according to keynesian. Keynesians argue the opposite for fiscal policy, suggesting that it is an effective tool. And monetarist use the opposite elasticities to argue monetary policy = good and fiscal policy = bad.
These are extreme monetarist/keynesian views, in reality each school of economics probably accepts that both policies have a certain degree of effectiveness, however, keynesians still believe fiscal to be more effective and opposite for monetarists.

I hope I didnt confuse you. Someone correct me if i am wrong plz.
look on tutor2u.net and bized.ac.uk very useful economics websites...

Reply 2

Ellie4

No - that's been a great help. Thankyou :smile:

I'll rep you when I can, too much in the last 24 hours apparantly!

Reply 3

S1M

Thanks... it might be a bit outside the A level syllabus, i learnt it once when i was bored and i had an economics exam the next day, i was hoping to put it in... lol... it was not entirely relevent but i still put it in as I took the effort to learn it and i ended up with a B in that module lol... other modules were As so I dont need to resit... I would not use all this IS-LM analysis stuff (i think its degree level) in your exam but I hope it will give u the general idea of the differences... well it helped me understand the differences rather than just accepting the respective views of each school of economics..

Reply 4

Ellie4

Yeah I'm only doing AS so I think I'm ok without it, it was just curiousity for the subject really!

Reply 5

S1M

Just thought of a few more features of keynesian/monetarists:
keynesians believe wages are "sticky downwards" i.e they don't go down in nominal terms. But in the long run real wages can fall. Monetarist (or is it classicalists in this case?) believe that real wages can can change in the short run in order for the market to clear.

Classicalists also believe in the wage-price spiral which causes inflation.

Also monetarists believe that only increases in the money supply causes inflation, whilst keynesians argue that it is also possible that inflation causes an increase in the money supply and also argue that inflation occurs because of other reasons too which I can't remember.

I think these differences are more on syllabus...