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Monetarism Vs Keynesianism

 Monetarism Versus Keynesianism

Policy Differences

The Monetarist Outlook

  1. The monetarists keep the variations in the supply of money that has a straight influence on total outlay and therefore on earnings.
  1. To start with, let us assume the central bank has purchased securities in the open market. It increases rates of securities and lowers the interest rates.
  1. Public will thus commence selling securities and keep more funds. Also they expend their surplus money balances on financial assets and durable consumer commodities.
  1. Others paying attention by low rates of interest borrows from banks for outlay on building houses, consumer durable commodities, plants and tools etc.
  1. These influences are likely to enhance total outlay and earnings. This is described in the below diagram.

  1. MD is the money demand curve and Ms is the supply of money curve. Both the curves inelastic interest.
  1. Nominally, both are in symmetry at OR rate of interest. The enhancement in the supply of money to Ms1 decreases the rate of interest from OR to OR.
  1. The money demand being associatively tactless to the rate of interest, it enhances from OQ to OQ1.
  1. However, the total outlay is very tactful to this drop in rate of interest so that it enhances from OE to OE1 in Panel (2) of the diagram where EC denotes the outlay curve.
  1. Therefore an expansionary fiscal policy is hugely flourishing in enhancing total outlay and earnings.

Now let us assume monetary policy in the next diagram which is given below.

  1. An enhancement in total outlay tends to expansion in the fiscal policy which shifts the outlay curve upward from EC to EC1 in Panel (4) of the diagram.
  1. A total outlay enhances from OE to OE1, hence national earnings also enhances.

  1. This tends to larger money demand for transactions intentions. With an outlook to meet this enhanced money demand, households and firms sell securities which they possess and also borrow from banks and other financial corporations.
  1. These inclinations possess the effect of increasing the rate of interest. As the money demand is associatively tactless to rate of interest variations, a very huge interest rate is needed to compare the money supply to the money demand.
  1. And this is shown in the Panel (3) of the diagram, where the enhanced money demand is shown by the MD1 curve and the hike in the rate of interest by RR1.
  1. However such a huge enhancement in rate of interest has the consequence of an expansionary monetary strategy is only EE2.
  1. Therefore, as per the monetarists, an enhancement in government outlay as a consequent of an expansionary monetary strategy tends to an enhancement in government outlay and earnings which tends to a huge hike in the interest rate that in turn decreases private outlay almost similar to the enhancement in government outlay.

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