A discussion on the keynesian monetarist and cost push theory of inflation

The classical tradition of partial equilibrium theory had been to split the economy into separate markets, each of whose equilibrium conditions could be stated as a single equation determining a single variable. The theoretical apparatus of supply and demand curves developed by Fleeming Jenkin and Alfred Marshall provided a unified mathematical basis for this approach, which the Lausanne School generalized to general equilibrium theory. For macroeconomics the relevant partial theories were:

A discussion on the keynesian monetarist and cost push theory of inflation

Monetarist View or Monetary Theory of Inflation! The monetarists emphasise the role of money as the principal cause of demand-pull inflation.

They contend that inflation is always a monetary phenomenon. Its earliest explanation is to be found in the simple quantity theory of money. Where M is the money supply, V is the velocity of money, P is the price level, and Q is the level of real output.

With flexible wages, the economy was believed to operate at full employment level. The labour force, the capital stock, and technology also changed only slowly over time. Consequently, the amount of money spent did not affect the level of real output so that a doubling of the quantity of money would result simply in doubling the price level.

Until prices had risen by this proportion, individuals and firms would have excess cash which they would spend, leading to rise in prices.

A discussion on the keynesian monetarist and cost push theory of inflation

So inflation proceeds at the same rate at which the money supply expands. In this analysis the aggregate supply is assumed to be fixed and there is always full employment in the economy.

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Naturally, when the money supply increases it creates more demand for goods but the supply of goods cannot be increased due to the full employment of resources. This leads to rise in prices.

But it is a continuous and prolonged rise in the money supply that will lead to true inflation. This classical theory of inflation is explained in Fig.

A discussion on the keynesian monetarist and cost push theory of inflation

When the quantity of money is OM, the price level is OP. When the quantity of money is doubled to OM2 the price level is also doubled to P2. Further, when the quantity of money is increased four-fold to M4, the price level also increases by four times to P4. Inflation everywhere is based on an increased demand for goods and services as people try to spend their cash balances.

Since the demand for money is fairly stable, this excess spending is the outcome of a rise in the nominal quantity of money supplied to the economy.

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So inflation is always a monetary phenomenon. Next Friedman discusses whether an increase in money supply will go first into output or prices. Initially, when there is monetary expansion, the nominal income of the people increases.

Its immediate effect will be to increase the demand for labour. Workers will settle for higher wages. Input costs and prices will rise.

ADVERTISEMENTS: Monetarist View or Monetary Theory of Inflation! The monetarists emphasise the role of money as the principal cause of demand-pull inflation. Monetarist View or Monetary Theory of Inflation! Controversy between Keynesian and Monetarist Views | Money Economy ; Mixed Demand-Pull and Cost-Push Inflation! Inflation. The part of this that I have trouble with is the Irwin Great Depression argument involving accumulation of physical gold in France. It also seems mirrored in the Tim Brooks argument in Vermeer’s Hat (podcast and book) about silver accumulation in China before the collapse of the Ming dynasty. [2] SAP is an acronym for Structural Adjustment Program, a set of economic policies inspired by the theoretical framework of neo-classical monetary theory and imposed on several debtor nations by the IMF and World Bank in the s and 80s. Nigeria officially adopted SAP in

Profit margins will be reduced and the prices of products will increase. In the beginning, people do not expect prices to continue rising. They regard the price rise as temporary and expect prices to fall later on.

Consequently, they tend to increase their money holdings and the price rise is less than the rise in nominal money supply.

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Gradually people tend to readjust their money holdings. Price then rise more than in proportion to the money supply. The precise rate at which prices rise for a given rate of increase in the money supply depends on such factors as past price behaviour, current changes in the structure of labour, product markets and fiscal policy.

Thus, according to Friedman, the monetary expansion works through output before inflation starts. Suppose the money supply is increased at a given price level P as determined by D and S curves in Panel B of the figure.

The initial full employment situation at this price level is shown by the intersection of IS and LM curves at E in Panel A of the figure where R is the interest rate and YF is the full employment level of income.

Now with the increase in the quantity of money, the LM curve shifts rightward to LM1 and intersects the IS curve at E1 such that the equilibrium level of income rises to Y1 and the rate of interest is lowered to R1. As the aggregate supply is assumed fixed, there is no change in the position of the IS curve.

This raises the price level, the aggregate supply being fixed, as shown by the vertical portion of the supply curve S. The rise in the price level reduces the real value of the money supply so that the LM1 curve shifts to the left to LM.Keynesian Inflation Theory.

John Maynard Keynes Source: Reproduced with permission of the IMF. Keynes’s cost-push and demand-pull inflation theory. is therefore useful in explaining more short-term changes in the rate of inflation and probably much more so than Monetarist doctrine.

This has implications for central banks, which usually. Lauchlin Currie and Hyman Minsky on Financial Systems and Crises In November , Hyman Minsky visited Bogotá, Colombia, after being invited by a group of professors who at that time were interested in post-Keynesian economics.

So a change in A will generate a change in Y according to the this formula: (12) ΔY = kΔA. where k = 1/(1 – c*(1-t) + m) and is the expression for the expenditure multiplier.

05Aug03 - Bank watching in Basel All pictures on this page are by Richard Janssen I was on business-travel from city to city in Switzerland. After the work in Basel . Goldsmiths, University of London is in South East London. We offer undergraduate and postgraduate degrees as well as teacher training (PGCE), Study Abroad and short courses.

Milton Friedman (/ ˈ f r iː d m ən /; July 31, – November 16, ) was an American economist who received the Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the complexity of stabilization policy.

With George Stigler and others, Friedman was among the intellectual leaders of the second generation of Chicago.

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