4.13. Keynesian and Monetarist Schools

Question 1

Key proponent of the Keynesian View

Answer 1

John Maynard Keynes

Question 2

Key proponent of the Monetarist View

Answer 2

Milton Friedman

Question 3

Market Equilibrium in Keynesian and Monetarist View

Answer 3

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.

Question 4

Market Efficiency in Keynesian and Monetarist View

Answer 4

Keynesian
- Markets are generally inefficient

Monetarist
- Markets are efficient.

Question 5

Market Flexibility in Keynesian and Monetarist View

Answer 5

Keynesian
- Markets are generally inflexible.

Monetarist
- Markets are flexible.

Question 6

Business Cycles in Keynesian and Monetarist View

Answer 6

Keynesian View
- Use of counter cyclical fiscal policy to control the swings in the business cycle.

Monetarist View
- No view

Question 7

Macroeconomic Equilibrium in Keynesian and Monetarist View

Answer 7

Keynesian View

• Usually occurs at below full employment.
• Intersection of AE and Y.

Monetarist View
- Occurs at full employment.

Question 8

Aggregate Demand in Keynesian and Monetarist View

Answer 8

Keynesian View
- Affected by consumer and business sentiment (“animal spirits”)

Monetarist View
Affected by changes in the money supply

Question 9

Multiplier Effect in Keynesian and Monetarist View

Answer 9

Keynesian View
- Key concept: Fiscal multiplier occurs through

Monetarist View
- injections of government spending. 1/MPW.
Money multiplier

Question 10

Accelerator Effect in Keynesian and Monetarist View

Answer 10

Keynesian View
- Key concept: believe in the accelerator effect

Monetarist View
- No view

Question 11

Aggregate Supply in Keynesian and Monetarist View

Answer 11

Keynesian View
- Horizontal, upward sloping and vertical

Monetarist View
- Vertical in the LR.

Question 12

Prices affected by in Keynesian and Monetarist View

Answer 12

Keynesian View
- Current rate of inflation

Monetarist View
- Expected rate of inflation (inflation expectations are very important).

Question 13

Causes of Inflation in Keynesian and Monetarist View

Answer 13

Keynesian View
- Cost-push inflation and demand-pull inflation

Monetarist View
- Monetary inflation (increases in the money supply)

Question 14

Solutions to Inflation in Keynesian and Monetarist View

Answer 14

Keynesian View
- Use of contractionary fiscal policy (increase T / decrease G)

Monetarist View
- Contractionary monetary policy (increase interest rates / control money supply).

Question 15

Adaptive Expectations in Keynesian and Monetarist View

Answer 15

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

Question 16

Causes of Unemployment in Keynesian and Monetarist View

Answer 16

Keynesian View
- Due to a lack of AD (cyclical unemployment).

Monetarist View
- Due to supply-side factors (Natural Rate of Unemployment)

Question 17

Solutions to Unemployment in Keynesian and Monetarist View

Answer 17

Keynesian View
- Expansionary fiscal policy

Monetarist View
- Supply-side policies

Question 18

Phillips Curve in Keynesian and Monetarist View

Answer 18

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.

Question 19

Crowding out effect in Keynesian and Monetarist View

Answer 19

Keynesian View
- No crowding out effect during a recession.

Monetarist View
- Government borrowing causes the crowding out effect.

Question 20

Liquidity Trap in Keynesian and Monetarist View

Answer 20

Keynesian View
- Believe in the Liquidity Trap

Monetarist View
- Reject the Liquidity Trap.

Question 21

Paradox of Thrift in Keynesian and Monetarist View

Answer 21

Keynesian View
- Believe in the Paradox of Thrift

Monetarist View
- Reject the Paradox of Thrift

Question 22

Policies to control the economy in Keynesian and Monetarist View

Answer 22

Keynesian View
- Use tax and government spending (fiscal policy)

Monetarist View
Use the money supply (monetary policy)

Question 23

Solution to a recession in Keynesian and Monetarist View

Answer 23

Keynesian View
- Increase government spending and/or decrease taxation

Monetarist View
- Increase the money supply

Question 24

Main role of the government in in Keynesian and Monetarist View

Answer 24

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.

Question 25

Summary of in Keynesian and Monetarist Views

Answer 25

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.