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Keynesians and Monetarists have differing views on the causes of inflation; Keynesians attribute it to demand pull and cost push factors, while Monetarists focus on the increase in money supply. Keynesians advocate for active government intervention through fiscal and monetary policies to manage inflation, whereas Monetarists prefer a controlled money supply with minimal government involvement. Despite their differences, both schools recognize inflation as a significant economic issue and acknowledge the role of aggregate demand in its dynamics.

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14 views2 pages

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Keynesians and Monetarists have differing views on the causes of inflation; Keynesians attribute it to demand pull and cost push factors, while Monetarists focus on the increase in money supply. Keynesians advocate for active government intervention through fiscal and monetary policies to manage inflation, whereas Monetarists prefer a controlled money supply with minimal government involvement. Despite their differences, both schools recognize inflation as a significant economic issue and acknowledge the role of aggregate demand in its dynamics.

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b) Compare and contrast the Keynesian and monetarist perspectives on the causes of inflation

highlighting their areas of agreement and disagreement.

Inflation is defined as a sustained increase in the general price level.Keynesians and


Monetarists have different perspectives on inflation addressing the general increase in prices
over time but differ in their explanations,policy implications and the role of government in
managing inflation.

Key differences emerge in the underlying causes of inflation and the appropriate policy
responses.Keynesians argue that inflation is often driven by demand pull and cost push
factors.Excess demand due to high government spending or consumer demand leads to higher
prices.Monetarists on the other hand agrees that inflation is largely caused by an increase in
money supply independent of demand pull factors and cost push factors.They believe that a
rapid increase in money circulation outpaces the growth of real output ,creating inflationary
pressures.

Moreso, Keynesians believe that fiscal and monetary policy should be actively used to manage
aggregate demand.During times of inflation they advocate for tightening fiscal policy for
example higher taxes and lower government spending and monetary policy for example interest
rates to reduce demand and control inflation.Whilst monetarists argue that the primary tool for
managing inflation is controlling the money supply .They assert that central banks should focus
on stable , predictable growth of the money supply rather than trying to adjust to short term
fluctuations in demand.

Moreover,on the view on government intervention, Keynesians support active government


intervention in the economy including the use of fiscal policy to counteract economic
fluctuations. In times of inflation,they argue for reducing government spending and increasing
taxes to control demand.Whilst monetarists believe that less government intervention is
necessary and that market forces ,when combined with a controlled money supply will neutrally
stabilise inflation.

However ,these two schools of thought tthat is the Keynesians and Monetarists both agree on
several key points despite their differences .Both schools agree on inflation as a real economic
issue .They acknowledge that inflation undermines economic stability.

Also they agreed on the role of aggregate demand.While they differ on its relative
importance,both theories recognize the influence of aggregate demand on inflation.Keynesians
highlighted demand pull inflation,while monetarists agree that demand can contribute to inflation
but focus more on how money supply affects demand.

Conclusively, Keynesians and Monetarists both acknowledge inflation as a significant economic


issue but offer different explanations and solutions.Keynesians view inflation as a result of
imbalances in demand and cost push factors advocating for government intervention to manage
aggregate demand.Monetarists conversely argue that inflation is primarily driven by excessive
growth in the money supply and emphasize controlling inflation through monetary policy .While
they agree on the importance inflation expectations.

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