ACCA - F1 ACCOUNTANT IN BUSINESS
Keynesianism: believe that prices and wages are not flexible
and are sticky, especially downward (i.e. defined basic pay). The central
assumption is economy often operate at less than full employment and market
system does not self-adjust to changes. The stickiness of prices and wages in
downward direction prevents the economy's resources from being fully employed
and thereby prevents economy from returning to natural level of GDP. Keynesian
theory is a rejection of Say's Law and the notion that economy is self-regulating.
It supports government intervention (through fiscal policies) to regulate the
market and stabilize the business cycle. According to Keynes, 'demand creates
its own supply'. Under Keynes if economy faces recession government increase
spending, lower tax and interest rate and where, economy faces inflationary gap
government spends less increase tax and interest rate.
Monetarism: Focus on monetary policy i.e. supply of money.
The monetarist view begins with an classical concept of demand for money. Money
serve three ways, (1) medium of exchange, (2) holding wealth as cash i.e. store
of value and (3) used to measure the value of good. The demand of money to hold
is inversely relate to 'velocity of money' (number of times average dollar is
spent in a year). The velocity of money is controlled by central bank's
influence in interest rates and supply of money through purchase and sales of
treasury bills. The demand for money depends on inflation as well. The demand
will rise if price rises, quantity produced rises, interest rate falls and
people expect for low rate of inflation and vice-versa. The central bank plays
important role in imposing monetary policies in the market through financial
institutions to control the supply of money in the economy.
Disclaimer statement: Discussion topic and written
presentation are adjusted to personal understanding and hereby takes no account
for any misunderstanding by the users of this article.
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