Answer to Question #249822 in Finance for Lutendo

Question

Using diagrams and examples, compare and contrast the Classical economists’ Quantity Theory and the 

Keynesian’s Liquidity Preference Theory of money demand.

Answer 1

Classical economics focuses less on utilization of fiscal policy in managing aggregate demand. The theory is based on monetarism, which focuses on controlling supply of money by the monetary policy while the Keynesian liquidity preference theory highlights that the government is entitled to fiscal policy in controlling instincts such as recession.

Below are the graphs.

Classical view of LRAS

Keynesian view of LRAS