A Keynes vs Monetarist view MACRO ECONOMIC POLICY A Keynes vs Monetarist view

JOHN MAYNARD KEYNES

KEYNES THEORY Looks at the role that fiscal policy can play in stabilizing the economy. Keynesian theory suggests that higher government spending in a recession can help the economy recover quicker. Keynesians say it is a mistake to wait for markets to clear like classical economic theory suggests

MAIN THOUGHTS [1] & reducing spending In a recession, people responded to the threat of unemployment by increasing saving & reducing spending

STIMULATES AD and REAL GDP MAIN THOUGHTS [2] RECESSION Government intervention STIMULATES AD and REAL GDP

Can you show this RESULT on a graph?

Does yours look like this? What about Policy Tools? Which ones can be used to stimulate AD

What are YOUR THOUGHTS???

So What about AGGREGATE SUPPLY ???

MAIN THOUGHTS [3] Workers do not accept nominal wage cuts, Wages may be ‘sticky downward’/ inflexible’ Workers do not accept nominal wage cuts, Firms have to lay off workers This can lead to involuntary unemployment. The economy slows down

MAIN THOUGHTS [4] In a recession, an economy has spare capacity, SO: increasing AD will have an impact on real output and only minimal effect on the price level.

INCREASE SPENDING (C + I + G + X – M).

MAIN THOUGHTS [5] This means Keynesians believe there is a multiplier effect This means an initial injection (eg increased government spending) into the circular flow can lead to a bigger final increase in real GDP

“It is more important to reduce unemployment than inflation”

Keynesians support expansionary fiscal policy in a recession. WHAT does this mean??? Keynesians reject real business cycle theories (an idea that the government can have no influence over the economic cycle)

MILTON FRIEDMAN

MONETARISTS VIEW The economy is naturally stable. Markets work well when left to themselves. Government interference can weaken the economy Fiscal Policy is often bad policy. A small role for government is good.

SOME THOUGHTS Monetarists stress the importance of controlling the money supply to keep inflation low Focus on MONETARY POLICY TOOLS which increase or decrease the supply of money and credit.

CONTROL MONEY SUPPLY

CONTROL of MONEY SUPPLY? MV=PQ IN THE SHORT RUN velocity is stable. This implies that in the short run, changes in the money supply are the dominant forces that change nominal GDP.

CONTROL of MONEY SUPPLY? MV=PQ) IN THE LONG RUN the economy is at potential output, so changes in the money supply only lead to higher prices, not higher output

CONTROL OF MONEY SUPPLY SHORT RUN? LONG RUN? SHOW THE DIFFENCE BY DRAWING THE AD/AS GRAPHS.

SOME THOUGHTS Monetarists stress the role of the natural rate of unemployment (supply side unemployment)

MONETARISTS say … “REDUCE INFLATION” Some thoughts MONETARISTS say … “REDUCE INFLATION” Monetarists more likely to place emphasis on reducing inflation than keeping unemployment low

"Inflation is always and everywhere a monetary phenomenon."

COMPLETE THE TABLE KEYNESIAN MONETARIST REGULATOR? POLICY ? POLICY TOOLS? AD? AS? GRAPH(S)

So Who is right ????