Question

the Classical, Keynesian and Monetarists view of monetary policy. Compare and contrast these three approaches to monetary policy. Include in your analysis if monetary policy is considered effective under all the schools. Moreover, what is the role of money in the economy? What causes inflation?

Answer 1

Classical economics and monetary policy: Classical economists hold the view that full employment is a general condition. Hence, monetary policy is not required to correct any disequilibrium in the economy. Disequilibrium in the economy is automatically corrected. The use of expansionary monetary policy would lead to a rise in the general price level only.

Keynesian view on monetary policy: Keynesians economists consider that monetary policy would be effective when demand is deficient but monetary policy suffers from the problem of a liquidity trap, thus it would not be much favorable in tackling the problem of deficient demand.

Monetarists and monetary policy: monetarists regard that monetary policy is most effective tool when compared to the fiscal policy. Monetary policy must be followed according to the fixed rule and erratic monetary policy would cause the economic fluctuation in economy.