Chapter 5R, Problem 4CTQ

To determine

The difference among recommendations made by the Keynesian, Neo-Keynesian, and monetarist policies at the time of low inflation and high unemployment.

Explanation of Solution

As per monetarists or classical economists, the money is neutral and the output achieved is irrespective of the money supply in the long run. As per monetarists, the money supply should be kept continuing as per the growth rate of output without interrupting demand for money using policies.

As per the Keynesian theory, monetary policy is not useful instead fiscal policy should be used to regulate the economy of the country. Inflation can be regulated by using fiscal policy. As per this, low inflation and unemployment can be regulated by imposing lower taxes and higher government spending.

As per the Neo-Keynesian model, both monetary policy and fiscal policy should be used to regulate the economy better. Monetary policies are used to regulate the money supply in the market by using various tools such as open market operations, fed reserves, etc. Whereas, fiscal policy should be used to regulate the revenues and expenditures of the government. Inflation can be regulated by purchasing treasury bills in open market operations so that the money supply can be increased. Taxes should be lowered which will promote new businesses to come up by using loans at low rates (as excess money supply prevails).

Conclusion:

The major difference between these economists' view is that monetarists believe in monetary policy to regulate the economy, Keynesians believe in fiscal policy and Neo-Keynesian believes in both policies to regulate the economy.

Economics Concept Introduction

Federal Reserve: Federal Reserve is the central bank that is responsible for controlling the country’s financial banking system. It has a basic tool by which it can regulate the money in the market which is referred to as open market operations.