Question

How the monetarism developed in response to Keynesianism, giving rise to the new classical macroeconomics?

Answer 1

Keynesianism & Monetarism
John Maynard Keynes suggested the theory of Keynesianism which calls for the spending in an economy which would further develop the demand and other economic factors which would give arise to the economic growth. The factors affecting production which is consumption, investment, production etc. are affected by the demand made in the economy. Keynes advocates the idea of government expenditure, which is the main factor stimulating spending could increase the demand for commodities in the market. According to Keynesianism, an economy could increase the level of income and output only by increasing spending. Also, it is in bound to government to stimulate the economy by spending more which further increases demand, consumption, income investment and production.
Monetarism suggested by Milton Friedman criticizes the Keynesian theory of government spending. According to monetarism, the economy could attain growth by the control over supply of money. An increased supply of money could increase the demand for the commodities which further increases the production and further develops the economy. Even if the theory suggests expansion of monetary supply, it advocates only the need of mild increase in the money supply in a period because a large expansion could affect the economy by the risk of inflation. Thus a mild increase in the supply of money could attract more demand and further economic growth slowly. It criticizes Keynesian idea which does not considered the change in supply of money rather than focusing only on spending. Monetary policy suggested the long run effect of change in supply by adopting the suitable interest rate level to manage the economy to growth. Thus, advocating the importance monetary supply, monetarism developed as new tool or stimulant for the growth of economies.