But, the process of reaching to the
stability is difference as per Monetary
and Keynesian approach.
The root of the monetarism is from the classical
Monetarism began with the Milton Friedman’s article
“The Quantity Theory of Money: A Restatement”
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
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
“Money does not matter”
Government intervention should not be restricted.
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.
1 Propounded by Milton Fredman
At full employment At below full
3 Cause of
Decline in money supply Decrease in government
responsibility or active
monetary policy (money
supply and interest rate)
Fiscal policy as an
important policy for
stability in economy
and tax rates)
Strong impact on price,
income and economic
weak impact on price
income and economic
7 Money supply Money does matter Money does not matter
8 Price affected By expected rate of By current rate of
9 Change in money
Affect only in price level Affect both price and
output in below full
employment and affect
only in prices in full
10 Money supply
Both direct and indirect
Only indirect effect
11 Role of
Should be reduced Should not be controlled
12 Way-out of
Does not give the
Give the suggestions -
through tax policies,
creating jobs for:
i) Increasing personal
ii) Increase in investment
demand (derived demand -
consumer demand leads to
iii) Government purchase,
extreme example is
"Digging Holes Just to Fill
them Back Up Again"
iv) Net exports