5/13/2019 Keynesianism vs Monetarism | Economics Help

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Keynesianism vs Monetarism
 Tejvan Pettinger  December 30, 2016 (https://www.economicshelp.org/blog/1113/concepts/keynesianism-vs-monetarism/) 
concepts (https://www.economicshelp.org/blog/category/concepts/)

Readers Questions Could you please explain the comparison between the Keynesianism & monetarism?

Keynesianism emphasises the role that scal policy can play in stabilising the economy. In particular Keynesian
theory suggests that higher government spending in a recession can help enable a quicker economic recovery.
Keynesians say it is a mistake to wait for markets to clear as classical economic theory suggests. See more at
Keynesian economics (https://www.economicshelp.org/blog/6801/economics/keynesian-economics/)

Monetarism emphasises the importance of controlling the money supply to control in ation. Monetarists are
generally critical of expansionary scal policy arguing that it will cause just in ation or crowding out
(https://www.economicshelp.org/blog/1013/economics/crowding-out/) and therefore not helpful.

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(https://www.economicshelp.org/wp-content/uploads/2017/12/keynesian-monetarist.jpg)

Principles of Keynesianism
In a recession/liquidity trap, government intervention can stimulate aggregate demand and real output
through government borrowing and higher government spending. Therefore Keynesians advocate
expansionary scal policy (https://www.economicshelp.org/blog/617/economics/impact-of-expansionary-
scal-policy/) in a recession.
Keynesians reject the theory of crowding out (http://econ.economicshelp.org/2007/02/keyness-paradox-
of-thrift.html) presented by Monetarists. Keynesians say that if there is a sharp rise in private sector
saving (and fall in spending), government spending can o set this decline in private sector spending.
Paradox of thrift (http://econ.economicshelp.org/2007/02/keyness-paradox-of-thrift.html). A key element
in Keynesian theory is the idea of a ‘glut’ of savings. Keynes argued in a recession, people responded to
the threat of unemployment by increasing saving and reducing their spending. This was a rational choice,
but it contributes to an even bigger decline in AD and GDP. This is why government intervention may be
needed.
Keynesians usually believe there is a degree of wage rigidity. In a recession, Keynes said wages might be
‘sticky downward’ as unions resist nominal wage cuts, and this can lead to real wage unemployment
(https://www.economicshelp.org/blog/1507/economics/wages-and-unemployment/).
In a recession, when an economy has spare capacity, increasing aggregate demand (AD) will have an
impact on real output and only minimal e ect on the price level.
Keynesians believe there is often a multiplier e ect
(https://www.economicshelp.org/macroeconomics/ scal-policy/multiplier-e ect/). This means an initial
injection into the circular ow can lead to a bigger nal increase in real GDP.
Generally, Keynesians are more likely to stress the importance of reducing unemployment rather than
in ation.
Keynesians reject real business cycle theories (an idea that the government can have no in uence over
the economic cycle)

Monetarism

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Monetarists are more critical of the ability of scal policy to stimulate economic growth.
Monetarists /classical economists believe wages are more exible and likely to adjust downwards to
prevent real wage unemployment.
Monetarists stress the importance of controlling the money supply to keep in ation low.
Monetarists more likely to place emphasis on reducing in ation than keeping unemployment low.
Monetarists stress the role of the natural rate of unemployment. (supply side unemployment)

Convergence of Keynesianism and Monetarism

The distinction between Keynesian and monetarists positions is a bit more blurred. For example, many
‘Keynesian’ economists have taken on board ideas of a natural rate of unemployment, in addition to demand
de cient unemployment. ‘New Classical’ economists are more likely to accept ideas of rigidities in prices and
wages.

Related

Keynesian vs Monetarist theories (https://www.economicshelp.org/keynesian-vs-classical-models-and-

policies/)
John Maynard Keynes (https://www.economicshelp.org/2008/07/john-maynard-keynes-great-
economists.html)
The debate over Keynesian Economics (https://www.economicshelp.org/2008/12/great-keynesian-
debate.html)

Video on Keynesian Economics

Keynesian Economics

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6 thoughts on “Keynesianism vs Monetarism”

Michael says: December 31, 2008 at 4:47 am
(https://www.economicshelp.org/blog/1113/concepts/keynesi
vs-monetarism/#comment-2246)

More speci cally Keynesian scal spending is meant to counter households’ and businesses’ (assumed)
increased saving during a recession. This can make a bit of a di erence to analyzing some problems. See
here for more.

Reply (/blog/1113/concepts/keynesianism-vs-monetarism/?replytocom=2246#respond)

KP Da Silva says: November 25, 2012 at 3:06 am

(https://www.economicshelp.org/blog/1113/concepts/keynesi
vs-monetarism/#comment-64182)

Schools of Thought

Money as an asset
Cost of holding money
Money and GDP
Importance of Money
In ation
Demand for money
Interest Rate

Reply (/blog/1113/concepts/keynesianism-vs-monetarism/?replytocom=64182#respond)

hiba says: January 16, 2013 at 10:30 am

(https://www.economicshelp.org/blog/1113/concepts/keynesi
vs-monetarism/#comment-75053)

what do monetarists say about the natural rate of unemployment being a ected by an increase in money
supply?

Reply (/blog/1113/concepts/keynesianism-vs-monetarism/?replytocom=75053#respond)

hiba says: January 16, 2013 at 10:31 am

(https://www.economicshelp.org/blog/1113/concepts/keynesi
vs-monetarism/#comment-75054)

whats the link btw natural rate of unemployment and money supply?

Reply (/blog/1113/concepts/keynesianism-vs-monetarism/?replytocom=75054#respond)

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(https://www.economicshelp.org/blog/6801/economics/keynesian-economics/)

burhan bukhari says: April 15, 2013 at 8:34 pm

(https://www.economicshelp.org/blog/1113/concepts/keynesi
vs-monetarism/#comment-99189)

what is the di erence between Keynesian and monetarists regarding AD and AS?

Reply (/blog/1113/concepts/keynesianism-vs-monetarism/?replytocom=99189#respond)

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