Question

suppose an economic boom is driven by very high levels of consumer confidence. compare and contrast the Keynesian and Monetarist approach in preventing the economy from overheating

Answer 1

Keynesians have a habit of reasoning as a result of price changes, assuming inflation comes from an overheating economy (it comes from easy money), and they also have a poor habit of assuming that elevated interest rates are tight money. They mistakenly see elevated interest rates as a means of controlling inflation. The elevated interest rates were created during 1979-80 by an easy money policy that increased interest rates through the impacts of revenue and Fisher. That's why this strategy of Keynes failed.

The world will always (finally) turn to monetarism for an answer when elevated inflation occurs. Hyperinflation roared across several European nations in the early 1920s. In terms of interest rates, Wicksell and Keynes abruptly stopped speaking about monetary policy and started talking about money supply as the main variable.

Do not depend on tax rises (MMT), price controls (statistics) or elevated interest rates (Keynesianism) if you want to manage elevated inflation. Instead, adopt a tight policy on cash. That always operates, and it's the only working policy. Close cash may increase interest rates or reduced rates, but inflation will always decrease

According to the Monetarist Rule, the demand for money is directly influenced by the overall price level, the money supply, and the velocity of money, or the annual turnover of a dollar. Monetarists argue that an increase in the money supply causes an increase in the price level overall . This theory's one hypothesis is that the economy works at full employment. If the economy is as complete jobs, the same percentage rise in inflation will lead in an rise in the cash supply. This relationship is generally not seen during a recession. Economic output is improved instead of rising inflation or the general price level.

Keynesians were largely in support of the use of fiscal policy when fighting recessions. Monetarists argued that as long as there was no change in the money supply (monetary policy), fiscal policy would accomplish nothing. Today, most economists take the view that the government does not need to pass a balanced budget, but that it should be used as an automatic economic stabilizer.

Keynesians think these strategies should be used discretionarily while the followers of contemporary consensus do not maintain a powerful stance either way. Classical economists and monetarist supporters take the view that any fiscal or monetary policy should be automatic, thereby eliminating the opportunity for political impact.