• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

"Examine the major areas of disagreement between Keynesians and monetarists. Comment briefly on the view that their disagreements are as much a matter of ideology as of economics."

Extracts from this document...


"Examine the major areas of disagreement between Keynesians and monetarists. Comment briefly on the view that their disagreements are as much a matter of ideology as of economics." Claudia Hafenmayr, 020664947 Term 2 Module: Macroeconomic Analysis The Keynesian Theory was founded by John Mainard Keynes, who published "The General Theory of Employment, Interest and Money" in 1936. During the 1930s the Classical economic theory failed to state the reasons for the economic problems in the great depression. They could not explain why the economy settled into an equilibrium at a high rate of unemployment. While Keynes was convinced that because of imperfect markets a modern economy could be at equilibrium at any rate of unemployment. " [T]he postulates of classical theory are applicable to a special case only and not the general case, the situation which it assumes being a limiting point of the possible positions of equilibrium." (Keynes, 1936, p.6) He concluded that an active fiscal policy is necessary to reduce high rates of unemployment. Throughout the 1960s and 1970s economists started to critique the Keynesian Theory and propounded a theory that stressed the efficiency of the free-market mechanism and the overriding importance of the money supply in economic policy .The monetarist concepts were originated from the Classical economics but they modified some of the Classical views. ...read more.


So at the intersection of the IS-LM curves both markets are in equilibrium. Monetary policy will result in a shift in the LM curve. A increase in the money supply will shift the curve to the right, a decrease to the left. Fiscal policy will shift the IS curve, e.g. a higher government expenditure or lower taxes will shift the curve to the right. In the Keynesian theory the IS curve is vertical as they believe that investment is not interest-elastic. LM curve is upwards sloping because the demand for money is assumed to be interest-elastic. IS r LM Y Y Y� Based on the assumed shapes it is understandable why Keynesian prefer fiscal policy to monetary policy. While a shift to the right of the IS curve will increase Y, a shift in the LM curve will only change the rate of interest. The Monetarists believe on the contrary that LM curve is vertical because money supply is assumed to be not interest-elastic. While the IS curve is downward sloping because they assume that interest rates effect investment. r LM IS Y Y� Y Monetarists favour monetary policy because in their model fiscal policy only changes the interest rate but not the output while monetary policy is able to increase Y. ...read more.


But it depends on the situation which theory is more useful. On the long run it is more realistic to assume a vertical AS-Curve and in the short-run a almost flat AS-Curve. So in that way the disagreements between Keynesians and Monetarists are more a matter of ideology as of economics. It is the same for the IS LM model, in reality neither the IS nor the LM curve is perfectly vertical but have an intermediate shape. As shown in the diagram a combination of fiscal and monetary policy can help to increase the output without increasing the rate of interest. E.g. through a higher government spending (shifts IS to the right, Y+, r+) and a increase in money supply (shifts LM to the right, Y+, r-). r IS LM r* Y� Y�� Y In conclusion it is obvious that Keynesians and Monetarist have very different views about various factors of economy. Because of those underlying concepts they disagree on the best way to stabilise the economy. They also differ in their main aims, while unemployment is the most important problem for the Keynesians, monetarist concentrate on fighting inflation. So besides the aspect of time, the Keynesian theory offers more solutions for an economy in a recession while the monetarist theory contains answers for inflationary problems in boom periods. So on the whole the theories seem rather to complement than to exclude one another. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our University Degree Macroeconomics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related University Degree Macroeconomics essays

  1. A Mathematical View of the Keynesian Model. The mathematics of the model are presented ...

    Income (Y) Consumption (C) Investment (I) Net Exports (NX) Government (G) Aggregate Demand (AD) Excess Demand 1000 2800 180 70 150 3200 2200 2000 3600 180 70 150 4000 2000 3000 4400 180 70 150 4800 1800 4000 5200 180 70 150 5600 1600 5000 6000 180 70 150 6400

  2. Analysis of external debt: Romania vs Bulgaria

    Still, the external debt is repaid by installments, only one part being paid back from that year's GDP. PDE must be under 100%, surpassing this limit means that the volume of the external debt exceeded the added value created in the country in one whole year.

  1. Using graphical analysis, examine the view that unemployment is essentially a Keynesian problem

    If there is resistance to the wage cuts, assuming that wages remain fixed, there will now be disequilibrium unemployment of b-a. Figure 1 During the recession in 1990-1992, the demand levels for goods and services inevitably fell as unemployment rose.

  2. Macroeconomic analysis of Brazil. In the following sections, we give a brief overview ...

    Using the extended IS-LM framework, we can show how a tight monetary policy helps in reducing inflation: In the diagram, the economy is initially in equilibrium at E0 with output equal to Y0, price P0 and rate of interest r0.

  1. Welfare Economics. In this essay I will be examine the arguments for and ...

    therefore MRSA1, 2 = P1/P2 The same implications apply for individual B. We can combine the two individual's indifference curves into a single figure using an Edgeworth box3.This is done by inverting individual B's indifference curve and superimposing it on individual A's indifference curve.

  2. The Global Economic Crisis. The present project analyses different approaches of the crisis ...

    the case of the Prell shampoo concept of telling two-friends-who-tell-two-friends and so on and multiply it by 1000. Also, Groupon managed to enhance the availability of its service on mobile devices in order for its customers to access all deals at any moment from everywhere.

  1. The Policy Implications of the Relationship between Inflation and Unemployment in Canada (1967 ...

    would experience accelerating deflation, if unemployment was below the natural level the economy would experience accelerating inflation. Supposing say a government wished to reduce unemployment. It would reduce unemployment by expansionary monetary and fiscal policy to boost output. Firms enjoying higher profits would be able to pay higher wages to attract workers.

  2. The purpose of this coursework is to study the characteristics of inflation in the ...

    ? currency exchange banks for foreign exchange is the need for more paper money that fills channels of money and leads to inflation. The velocity of circulation of money in a period of inflation determined by the following factors: Consumer-inflation of the ruble, due to a loss of state control

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work