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Using the IS-LM model, explain the different views, held by Monetarists and Keynesians, about the effectiveness of fiscal and monetary policies. In you view, which one of these two approaches is more convincing and why - Coursework Example

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This model attempts to explain the investing decisions made by investors given the amount of money they have available and the interest rate they will receive. The IS curve…
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Using the IS-LM model, explain the different views, held by Monetarists and Keynesians, about the effectiveness of fiscal and monetary policies. In you view, which one of these two approaches is more convincing and why
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Using the IS-LM model, explain the different views, held by Monetarists and Keynesians, about the effectiveness of fiscal and monetary policies. In you view, which one of these two approaches is more convincing and why

Download file to see previous pages... At this point, when aggregate demand for goods rises, the assumption is that firms are willing to hire more workers in the short run to produce the extra output and meet the expanded demand. The long run equilibrium is where labor market is in equilibrium and full employment. This means that if there is higher demand, firms will increase prices until they hire the optimal amount of workers that will produce the potential level of output.
Keynesians and Monetarists have disagreed on many policy issues, one of them being the fiscal and monetary policies. Controversy exists between Keynesians and Monetarists as to the strength and effectiveness of fiscal & monetary policies with each having a differing point of view. The debate between Keynesian and Monetarist theories concerning fiscal and monetary policies might seem academic but its implications are actually relevant to both everyday investment decisions and economic policy. Keynesians claim that both are potent weapons and how much they affect the economy depends upon circumstances. They add that fiscal policy works faster than monetary policy. On the other hand, Monetarists1 claim that the effect of fiscal policy is weak while that of the monetary policy is strong. They further assert that monetary policy works faster. Therefore, a clear understanding the major contrasts in the two schools of thought in macroeconomics will help in the assessments of risk and expectations for economic growth.
Keynesians say that the effect of pure fiscal policy depends upon the size of shift of IS and slopes of both IS and LM. Suppose the fiscal authorities pursue an expansionary policy by increasing government spending and uses bonds to finance it. An increase in the government spending will shift the IS curve to the right. Such a policy will be most effective if the IS curve intersects the LM curve in the liquidity trap range, where the LM curve is said to be perfectly elastic. It is somewhat effective if it occurs in the ...Download file to see next pagesRead More
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