Monetarism Vs. Keynesian

Monetarism vs. Keynesian Page 2.

Objective: My objective is to try to compare the Aggregate Demand - Aggregate Supply

Model from the Monetarism and Keynesian interpretation. Here is a brief history of what I have

read. What I get about the Keynesian Macroeconomics is, it was created in the early 1970s, and

was the work of economists centered at the Universities of Chicago and Minnesota. The main

players that created this concept according to (Hoover) were "Robert Lucas, Thomas Sargent,

Neil Wallace, and Edward Prescott". The name is from John Maynard Keynes his different style

between his own Macroeconomics and his forebears, Keynes had knowingly stretched a point by

comparing his forebears A.C. Pigou and Alfred Marshall, from the older classical political

economists such as David Richardo, this is where the name Classical comes from. According to

(web.books) "the classics saw the price system in a free economy as efficiently guiding the

mutual adjustment of Aggregate Demand and Supply in all markets", this was including the

labor market. Unemployment would arise only because of a market fault with the intervention of

the government or the action of Labor Unions and could be eliminated through removing the

faults. In contrast, Keynes shifted the focus of his analysis away from individual markets to the

whole economy. He argued that even without market faults, aggregate demand might fall short of

the aggregate productive capacity of its labor and capital such as plants, equipment, raw material,

and infrastructure. In which a situation of unemployment is largely involuntary that is, workers

Monetarism vs. Keynesian Page 3.

might be unemployed even though they are willing to work for a lesser pay than the wage the

firms are paying their current workers.

Support: The fundamental principle of the Monetarism theory is that the economy is

self-regulating. Monetarism economists maintain that the economy is always capable of

achieving the natural level of real GDP or output, which is the level of real GDP that is

obtained when the economy's resources are fully employed. Monetarists are more critical of

ability of fiscal policy to stimulate growth in real GDP. Monetarists/Classical economists

believe