Monetarists believe that the Keynesian’s focus on fiscal policy is misplaced.  The Keynesian model fails to consider the long-term harm that can be caused by sustained government budget deficits.  Besides, there may be a lag in  the stimulative effects of fiscal policy.  This may be too slow to prevent an economic crisis from blowing up.

Rather than fiscal policy, monetarists believe money supply has the greatest effect on the economy .  When the money supply grows too fast, the boom is unsustainable.  When it grows too slow, the economy contracts.  As such, one of the main culprits of business cycles is the variations in money supply caused by monetary policyMonetarists recommend that the government should follow a policy of steady and predictable increases in the money supply, in order to keep aggregate demand stable and growing.

Compare: Neoclassical, Keynesian, New Classical

Also Known As:
Monetarist Theory
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