Answer to Question #47710 in Macroeconomics for Aditi

Question

Describe the contrasting views of the Keynesians and the monetarists with regard to an appropriate expansionary policy to bring an economy out of a period of high unemployment caused by insufficient aggregate demand.

Answer 1

The Keynesians note that higher government spending in a recession can help the economy to recover. They note that insufficient demand causes unemployment and that excessive demand results in inflation; government should therefore manipulate the level of aggregate demand by adjusting levels of government expenditure and taxation.
Monetarists note that it is important to control the money supply and inflation. Monetarists fault Keynesians for relying too much on government spending and taxation policies, which over-stimulates the economy, causing the inflation.