Answer to Question #46921 in Macroeconomics for julian

Question #46921
outline the differences in arguments of the monetarist and keynesians in holding money and the effects of money supply growth
Expert's answer
Keynesians presume that speedy growth leads to labor and capacity shortages that result in higher prices. Of course if we ignore that labor and capacity are dynamic as opposed to static, and similarly ignore technological enhancements that allow companies to produce increasing amounts with less labor and capacity, we can’t ignore that the U.S. is not an island. Assuming shortages, American producers regularly access the world’s labor and the world’s factories such that growth could never impact the price level as is assumed.
About the U.S. not being an impregnable economic island, monetarists should take note as their theory similarly presumes Fortress U.S.A. They believe dollar credit is controlled by the Fed through the banks it regulates, as opposed to credit for dollars being a rather broad concept such that any Fed ‘tightness’ has historically been made up for by inflows of dollars (think the eurodollar market among countless others) from around the world.

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