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The very simple definitions of Monetarism and Keynesianism can be stated as follows : Monetarism refers to the followers of Friedman’s idea of “only money matter, nothing else matters” . Keynesianianism refers to followers of Keynes, who argued that, money does not matter and for economic stabilization, fiscal policy is far more important and effective than monetary politicy. Monetarists underline the effects of money to describe short term movements in national income. Monetarists also argue that downfalls in economy are results of significant contradiction of money and credit, meanwhile booms and inflations are the refined results of excessive increases in money supply.
    
According to monetarists, movements in money supply directly affect expenditure and GDP directly. Keynesians, on the contrary, state that these effects are to be worked through interest rates and the visible movements are results of indirect impacts. The view of monetarists that money supply directly effects the national income is due to the fact that money is an efficient substitute for all types of assets. The amount of money people want to hold is related to their income, naturally. If central bank increase the money supply, this would result in a decline in the interest rate. Residents, then, would tend to sell securities etc and their total money holdings will likely to increase. These residents will spend their excess money balances on financial assets. This increase in aggregate expenditure would force national income to ,also, increase. On the other hand, decrease in the money supply would raise interest rate. Effects of this change can be seen as a reduction in money holding of the people with accordence to their income level changes. To raise their holdings of money, they will reduce their aggregate expenditure and sell financial assets. This would result in a decrease in national income.
    

    If we analyse an expansionary monetary policy, in the light of monetarist approach as can be seen from the chain-reaction in the graph, the ultimate result would be an increase in aggregate expenditure and income.

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Léon (01:09 PM) :
hmm..
Léon (01:09 PM) :
dersin adı monetay economics
Léon (01:09 PM) :
theory değil
Léon (01:09 PM) :
muhahaha
...blade... (01:10 PM) :
MUAHHAHAHAHAH
...blade... (01:10 PM) :
DUR DUR
...blade... (01:10 PM) :
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The very simple definitions of Monetarism and Keynesianism can be stated as follows : Monetarism refers to the followers of Friedman’s idea of “only money matter, nothing else matters” . Keynesianianism refers to followers of Keynes, who argued that, money does not matter and for economic stabilization, fiscal policy is far more important and effective than monetary politicy. Monetarists underline the effects of money to describe short term movements in national income. Monetarists also argue that downfalls in economy are results of significant contradiction of money and credit, meanwhile booms and inflations are the refined results of excessive increases in money supply.
    
According to monetarists, movements in money supply directly affect expenditure and GDP directly. Keynesians, on the contrary, state that these effects are to be worked through interest rates and the visible movements are results of indirect impacts. The view of monetarists that money supply directly effects the national income is due to the fact that money is an efficient substitute for all types of assets. The amount of money people want to hold is related to their income, naturally. If central bank increase the money supply, this would result in a decline in the interest rate. Residents, then, would tend to sell securities etc and their total money holdings will likely to increase. These residents will spend their excess money balances on financial assets. This increase in aggregate expenditure would force national income to ,also, increase. On the other hand, decrease in the money supply would raise interest rate. Effects of this change can be seen as a reduction in money holding of the people with accordence to their income level changes. To raise their holdings of money, they will reduce their aggregate expenditure and sell financial assets. This would result in a decrease in national income. (Jhingan, 623)
    

    If we analyse an expansionary monetary policy, in the light of monetarist approach as can be seen from the chain-reaction in the graph, the ultimate result would be an increase in aggregate expenditure and income. Knowing that both curves are interest inelastic, increase in money supply to a higher level, reduces the interest rate from R to R1. Demand for money increases from Q to Q1.
But if we look at the expenditure curve graph (EC) , aggregate expenditure responds to this change at a broader range, increasing to E1. If we sum all these cause and effect relationships we can see that an expansionary monetary policy is efficiently reliable in increasing aggregate expenditure and income.
    The phrase “quantity theory of money” states as the relationship between the supply of money and the general price level. The monetarist belief that variations in money supply are “dominant impulse” (Brunner) causing fluctuations in the economy. If we want to produce monetarist results from the IS-LM model, there are some important points to be considered : In its underemployment form, demand for money is insensitive to interest rates. A monetarist must deny that the interest elasticity of demand for money is infinite. Aside from all, if we state a vertical LM curve, we can get and IS-LM model to produce monetarist results, under full employment assumption of course.

References:
Main Sources:
Jhingan, M.L. Macroeconomic theory. Konark Pub. Delhi 1989
Lecture Notes
Additional Reading:
M. Friedman and Anna Schwartz – A monetary history of the US, 1963
M.K.Lewis and P.Mizen , Monetary Economics
Various internet resources
Graph:
Self produced







Monetarism and Keynesianism argue simply the opposite views. Monetarists state that only money matters and the economic recessions and expansions are caused by decreases and increases of the money supply. They emphasise that the growth rate of money is the principal determinant of the behaviour of national income. Though the monetarists have tried to enforce their position on the basis of empirical studies yet they are themselves skeptical about the success of monetary policy in contrast to fiscal policy. They agree that as economic stabilizer, monetary policy may do more harm than good because of the operation lag. The operation lag refers to the time elapsing between the taking of action and the effective impact of that action on the economic situation. On the average, it takes a long time for a change in the money supply to affect national income, so the operation lag is long. In contrast to the monetarists, the Keynesians regard monetary policy relatively less effective because of the relative interest inelasticity of aggregate expenditure. If we consider an expansionary monetary policy. Suppose that central bank purchases securities in the open market. Price of securities rises and the interest rate falls. People start selling securities in order to hold more money. As the demand for money is highly elastic in the Keynesian system, even a small fall in the rate of interest will induce people to sell securities and hold more money. After this, money supply increases due to the central bank’s action. Thus, an expansionary policy is not succesful in raising aggregate expenditure and income much.Though monetary policy is relatively less effective under the Keynesian system, fiscal policy is relatively more effective. An increase in aggregate expenditure for raising national income leads to expansion in economy. National income rises. There hapeens an increase in demand for money by the people for transaction purposes. To meet this increased demand for money, householders and firms sell securities and they borrow funds from banks. These movements tend to raise the rate of interest. Demand for more loans induce commerical banks increase, resulting in an increase in the money supply. High interest rates means fall in the price of bonds. (Jhingan, 626)
Keynesians take a more realistic view of monetary and fiscal policy efficiencies. They do not deny that money does matter, for they believe that monetary policy does influence national income but via changes in the interest rate. They combine monetary policy with fiscal policy for controlling booms and inflations.

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