keynesianism vs monetarism

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The document compares the monetary and Keynesian approaches to economic stability. The monetary (or monetarist) approach is based on the role of money in stabilizing aggregate demand, and believes that limiting government intervention and controlling the money supply are key. The Keynesian approach focuses on the role of government spending in stabilizing aggregate demand, and does not restrict government intervention. It believes fiscal policy tools like tax rates and government spending are most important for achieving economic stability, especially during downturns when suggested solutions include increasing various types of spending.

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
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.

 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.

 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??

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)

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

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

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

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