Monetary policy is a Keynesian recommendation ??

Hi everyone,

I found this question in Sheweser practice questions :

Does make sens to u that it’s attributed to Kenysians rather than Monetarists ??

Keynesian people say that if you expand money supply (central bank quantitative easing), you will stimulate aggregate demand and thus increase GDP. This worked good in the great depression of 1929, however it didn’t some years ago. The reason is the rational expectations of economic agents (i.e. consumers, companies, etc) that prevent that even with a higher money available the economy won’t run good creating the famous “money tramp” (don’t know the exact name in english), so the aggregate demand stays low and crisis continues present.

Monetarists say that you can increase GDP with more money available, however this does not true in the long run, maybe in the short run only. Here starts the discussion of what are nominal variables and what are real variables. Money is a nominal variable and production (GDP) is a real one, nominal variables cannot affect real variables so easy and cannot persist in the long run.

Hope this helps.

thanks a lot Harrogath, much appreciated

so both Keynesians and Monetarists share this recommandation of using Money supply to stimulate economy. however, I always tought that Keynesians were most famous for encouraging government spending (G), if I was to pick which shool should be famous for using money supply as a stimulus I would say the monetarists.

you’re totally right about the effectivness of moneatry measure, it can generate “the liquidity trap” as is the case in Japan. mostly depends on the optimisme level of housholds according to Keynesian school. it won’t work out if there isn’t much belief in the process… and as you said should make apart real variables of nominal ones.

thx a lot