Keynesian and Monetarist schools

The Keynesian and Monetarist schools are two of the main theoretical frameworks in economics that have shaped our understanding of macroeconomic policy and the role of government in the economy. In this paper, we will explore the key ideas and principles of these schools, and examine the ways in which they differ from one another.

Keynesian Economics

Keynesian economics is a macroeconomic theory that was developed by economist John Maynard Keynes in the 1930s in response to the Great Depression. The key idea behind Keynesian economics is that the government has an important role to play in managing the economy and promoting economic stability and growth.

According to Keynesian theory, the economy is prone to fluctuations and is not always able to achieve full employment on its own. In times of economic downturn, Keynesians argue that the government should intervene by increasing government spending and/or cutting taxes in order to stimulate demand and boost economic activity. This approach is known as demand-side economics, as it focuses on the demand side of the economy rather than the supply side.

In addition to its emphasis on demand-side policy, Keynesian economics also focuses on the importance of aggregate demand, which is the total demand for goods and services in an economy. 

Keynesians argue that changes in aggregate demand can have a significant impact on economic activity, and that the government should use its tools of fiscal and monetary policy to manage aggregate demand in order to achieve economic stability and growth.

Monetarist Economics

Monetarist economics is a macroeconomic theory that was developed by economist Milton Friedman in the 1950s and 1960s. Unlike Keynesian economics, which emphasizes the role of government in managing the economy, Monetarist economics emphasizes the role of the money supply in driving economic activity.

According to Monetarist theory, the money supply plays a key role in determining the level of economic activity and the price level in an economy. Monetarists argue that changes in the money supply lead to changes in the level of economic activity, and that the government should focus on maintaining a stable and predictable money supply in order to achieve economic stability and growth.

In contrast to Keynesian economics, Monetarist economics emphasizes the importance of the supply side of the economy, and argues that policies that increase the productivity and efficiency of firms and workers can lead to long-term economic growth. Monetarists also argue that government intervention in the economy can be destabilizing, and that the best way to achieve economic stability is to let the market operate freely and allow the money supply to grow at a steady and predictable rate.

Conclusion

The Keynesian and Monetarist schools are two of the main theoretical frameworks in economics that have shaped our understanding of macroeconomic policy and the role of government in the economy. 

While these schools have different perspectives on the role of government and the importance of demand versus supply in the economy, they both recognize the importance of economic stability and growth and the role that fiscal and monetary policy can play in achieving these goals.