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3) Compare graphically how a Keynesian and a Monetarist would combat inflation. Be specific about their...

3) Compare graphically how a Keynesian and a Monetarist would combat inflation. Be specific about their policy recommendations and how they believe the policy impacts GDP. Illustrate each situation graphically using the Keynesian Model of Aggregate Demand and Aggregate Supply. What happens to prices and output in each case?

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Answer #1

Monetarists emphasize increasing interest rates (reducing the money supply, monetary policy) to fight inflation. Keynesians emphasize reducing demand in general, often through fiscal policy, using increased taxation or reduced government spending to reduce demand as well as by using monetary policy. Supply-side economists advocate fighting inflation by fixing the exchange rate between the currency and some reference currency such as gold. This would be a return to the gold standard. All of these policies are achieved in practice through a process of open market operations.

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