Answer: Both theories are centered about changes in aggregate demand as the central cause of the business cycle. Keynesian's use the concept of 'animal spirits' and the inability to forecast the future as the factor that leads to changes in investment. Monetarists assert that changes in the growth rate of the quantity of money is the factor that leads to business cycles. As for the adjustment following the initial shock of a change in the level of investment, both theories envision a multiplier effect. This effect causes a greater change in aggregate demand (and hence real GDP) than would occur strictly as a result of the initial change in real GDP. Both theories also believe that sticky wages limit the ability of the money wage rate to adjust to changes in aggregate demand.
Answer:
ReplyDeleteBoth theories are centered about changes in aggregate demand as the central cause of the business cycle. Keynesian's use the concept of 'animal spirits' and the inability to forecast the future as the factor that leads to changes in investment. Monetarists assert that changes in the growth rate of the quantity of money is the factor that leads to business cycles. As for the adjustment following the initial shock of a change in the level of investment, both theories envision a multiplier effect. This effect causes a greater change in aggregate demand (and hence real GDP) than would occur strictly as a result of the initial change in real GDP. Both theories also believe that sticky wages limit the ability of the money wage rate to adjust to changes in aggregate demand.