keynesianism vs monetarism


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keynesianism vs monetarism

  1. 1. By Sudarshan Kadariya JMC
  2. 2. But, the process of reaching to the stability is difference as per Monetary and Keynesian approach.
  3. 3. PROCESS
  4. 4.  The root of the monetarism is from the classical economist.  Monetarism began with the Milton Friedman’s article “The Quantity Theory of Money: A Restatement” in 1956.  The major concern is “role of money” in the economy for stability of aggregate demand.  “Money does matter”  Limited sectors like - note issue, peace and security, judiciary function, etc should be controled by the government.
  5. 5.  The concept was evolved in the economy after the inability of Monetary policy to curb the 1930’s Great Depression.  The foundation of Keynesian school of thought is after the publication of “ General Theory of Employment, Interest and Money” written by J.M. Keynes and published in 1936.  The major concern is “role of government” or “the government spending” in the economy to stabilize the aggregate demand.  “Money does not matter”  Government intervention should not be restricted.
  6. 6.  Economy in Equilibrium ???  Economic equilibrium is defined as the point where aggregate supply equals aggregate demand in the economy.  Money supply ????  currency  in circulation and demand deposits.  Economic stability??
  7. 7. S.N. Variables/ Indicators Monetarism Keynesianism 1 Propounded by Milton Fredman (Classical Economist) J.M. Keynes 2 Economic equilibrium At full employment At below full employment 3 Cause of depression Decline in money supply Decrease in government spending 4 Economic stability Government responsibility or active government through monetary policy (money supply and interest rate) Fiscal policy as an important policy for stability in economy (government spending and tax rates)
  8. 8. S.N.Variables/ Indicators Monetarism Keynesianism 5 Monetary changes Strong impact on price, income and economic activities weak impact on price income and economic activities 6 Relationship between supply and national income Unstable Stable 7 Money supply Money does matter Money does not matter 8 Price affected By expected rate of By current rate of
  9. 9. S.N.Variables/ Indicators Monetarism Keynesianism 9 Change in money supply Affect only in price level Affect both price and output in below full employment and affect only in prices in full employment 10 Money supply and aggregate spending Both direct and indirect effect Only indirect effect 11 Role of government Should be reduced Should not be controlled
  10. 10. 12 Way-out of Depression Does not give the suggestions Give the suggestions - government spending through tax policies, creating jobs for: i) Increasing personal consumption ii) Increase in investment demand (derived demand - consumer demand leads to capital demand) iii) Government purchase, extreme example is "Digging Holes Just to Fill them Back Up Again" iv) Net exports S.N.Variables/ Indicators Monetarism Keynesianism