How Do Monetarist's Views Compare With Modern Keynesian Approaches?


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Tariq Habib answered
In fact there has been considerable convergence in views between these schools over the last three decades, and the disputes today are ones of emphasis rather than of fundamental beliefs.

First the two schools disagree about the forces that operate on aggregate demand. Monetarists believe that aggregate demand is affected solely by the money supply and that the impact of money on aggregate demand is stable and reliable. They also believe that fiscal policy or autonomous changes in spending, unless accompanied by monetary changes will have negligible effects upon output and prices.

Keynesian economists, by contrast, hold that the world is more complex. While agreeing that money has an important effect upon aggregate demand, output, and prices, they argue that other factors also matter. In other words, Keynesian economists hold the money enters into output determination along with spending variables like fiscal policy and net exports.

The second major difference between monetarists and Keynesian economists concerns the behavior of aggregate supply. Keynesian economists emphasize the inertia in prices and wages. Monetarists think that Keynesian economists exaggerate the economy's wage price stickiness and that the short run aggregate supply curve is quite steep not vertical, perhaps but much steeper than a Keynesian economist would allow.

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