Question
Asked Jan 14, 2020
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The Keynesians challenge monetarists' monetary policy cure for the Great Depression. Use the aggregate demand and supply model to explain the Keynesian view. (Hint: Your answer must include the investment demand curve.)

 

 

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Expert Answer

Step 1

The great depression is a situation of a long and severe recession in an economy or a nation. The simple difference between the theory of monetarists’ monetary policy and Keynesian theory is that monetarists' economics involves the control of money, whereas Keynesian economics involves the role of government expenditure in the economy.

Step 2

Monetarists believe that by regulating the money supply, the inflation rate can be directly influenced and thus interest rate can also be influenced in the future. However, Keynesian economists do not entirely disregard the money supply role in the economy, but they believe that consumption, government expenditure, and net exports play more role in the market.

Step 3

Now as per Keynesian underemployment is a normal situation due to the inflexibility of wages, thus the AS curve is horizontal in the SR (short run). Initially, the economy is at point E1, but due to the great depression, the AD curve shifts from AD1 to AD2, resulting in the new equilibrium at point...

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