4.13. Keynesian and Monetarist Schools Flashcards
Key proponent of the Keynesian View
John Maynard Keynes
Key proponent of the Monetarist View
Milton Friedman
Market Equilibrium in Keynesian and Monetarist View
Keynesian
- Markets are “sticky”, which means they are slow to adjust to equilibrium. Disequilibrium occurs.
Monetarist
- Market equilibrium is achieved very quickly. Markets are mostly in equilibrium.
Market Efficiency in Keynesian and Monetarist View
Keynesian
- Markets are generally inefficient
Monetarist
- Markets are efficient.
Market Flexibility in Keynesian and Monetarist View
Keynesian
- Markets are generally inflexible.
Monetarist
- Markets are flexible.
Business Cycles in Keynesian and Monetarist View
Keynesian View
- Use of counter cyclical fiscal policy to control the swings in the business cycle.
Monetarist View
- No view
Macroeconomic Equilibrium in Keynesian and Monetarist View
Keynesian View
- Usually occurs at below full employment.
- Intersection of AE and Y.
Monetarist View
- Occurs at full employment.
Aggregate Demand in Keynesian and Monetarist View
Keynesian View
- Affected by consumer and business sentiment (“animal spirits”)
Monetarist View
Affected by changes in the money supply
Multiplier Effect in Keynesian and Monetarist View
Keynesian View
- Key concept: Fiscal multiplier occurs through
Monetarist View
- injections of government spending. 1/MPW.
Money multiplier
Accelerator Effect in Keynesian and Monetarist View
Keynesian View
- Key concept: believe in the accelerator effect
Monetarist View
- No view
Aggregate Supply in Keynesian and Monetarist View
Keynesian View
- Horizontal, upward sloping and vertical
Monetarist View
- Vertical in the LR.
Prices affected by in Keynesian and Monetarist View
Keynesian View
- Current rate of inflation
Monetarist View
- Expected rate of inflation (inflation expectations are very important).
Causes of Inflation in Keynesian and Monetarist View
Keynesian View
- Cost-push inflation and demand-pull inflation
Monetarist View
- Monetary inflation (increases in the money supply)
Solutions to Inflation in Keynesian and Monetarist View
Keynesian View
- Use of contractionary fiscal policy (increase T / decrease G)
Monetarist View
- Contractionary monetary policy (increase interest rates / control money supply).
Adaptive Expectations in Keynesian and Monetarist View
Keynesian View
- People have “waves of optimism and pessimism”. People have future orientated thoughts based on rational behaviour and information. People have rational expectations.
Monetarist View
- People have adaptive expectations - people form their expectations about what will happen in the future based on what has happened in the past
Causes of Unemployment in Keynesian and Monetarist View
Keynesian View
- Due to a lack of AD (cyclical unemployment).
Monetarist View
- Due to supply-side factors (Natural Rate of Unemployment)
Solutions to Unemployment in Keynesian and Monetarist View
Keynesian View
- Expansionary fiscal policy
Monetarist View
- Supply-side policies
Phillips Curve in Keynesian and Monetarist View
Keynesian View
- There is a trade-off between inflation and unemployment
Monetarist View
- There is a trade-off between inflation and unemployment in the short-run only.
- In the long-run, there is no trade off.
Crowding out effect in Keynesian and Monetarist View
Keynesian View
- No crowding out effect during a recession.
Monetarist View
- Government borrowing causes the crowding out effect.
Liquidity Trap in Keynesian and Monetarist View
Keynesian View
- Believe in the Liquidity Trap
Monetarist View
- Reject the Liquidity Trap.
Paradox of Thrift in Keynesian and Monetarist View
Keynesian View
- Believe in the Paradox of Thrift
Monetarist View
- Reject the Paradox of Thrift
Policies to control the economy in Keynesian and Monetarist View
Keynesian View
- Use tax and government spending (fiscal policy)
Monetarist View
Use the money supply (monetary policy)
Solution to a recession in Keynesian and Monetarist View
Keynesian View
- Increase government spending and/or decrease taxation
Monetarist View
- Increase the money supply
Main role of the government in in Keynesian and Monetarist View
Keynesian View
- To use counter-cyclical fiscal policy to reduce fluctuations in the business cycle.
- Use fiscal policy to control unemployment.
Monetarist View
- Use the money supply to control inflation.
Summary of in Keynesian and Monetarist Views
Keynesian Views
- The economy is mostly unstable.
- A Keynesian economist is likely to stress the need to reduce unemployment.
- Counter-cyclical fiscal policy is used to control the economy.
Monetarist Views
- The economy is mostly stable.
- A monetarist economist is likely to stress the need to control inflation.
- Changes in the money supply (monetary policy) is used to control the economy.
