Monetarist vs Keynesian Revised

Monetarist vs Keynesian – Economic Policy and Assumptions

Keynes vs Monetarists – The Macro Showdown

Imagine two economists walk into a pub (yes, the start of every good IB economics lesson). One orders a pint and says, “When things go wrong, the government needs to step in.” The other sips a black coffee and replies, “Let the market fix itself, mate.”

This is exactly the world of Keynesian vs Monetarist economics.

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IB Economics The Keynesian Mindset: "Wages Don’t Budge"

Key assumption? Wage inflexibility. John Maynard Keynes believed wages don’t fall easily. Not because the laws of economics say so - but because real people do not accept pay cuts.

Ever tried telling a footballer they’ll now earn less for hitting the net all season? Or tried asking a teacher to accept a 10% pay cut because “it’s good for the economic equilibrium of the school”? That’s the problem. Workers (and their unions) resist wage reductions, especially in recessions. This makes wages what we call sticky downwards.

Result? The economy gets stuck in a deflationary gap. Unemployment rises, output falls, and everyone waits for something to give.

The Keynesian Fix: Intervene!

Keynesians say, “Don’t just sit there - spend some money!” To restore full employment and boost growth, the government in this case should use:

• Expansionary fiscal policy – like tax cuts or increased government spending.

• Loose monetary policy – such as cutting interest rates to boost money borrowing and investment.

IB Economics Real-life Example: After the 2008 financial crisis, countries like the USA, UK, and China rolled out massive stimulus packages. In the US, the Obama administration injected $831 billion into the economy. Roads were built, jobs were saved, and the worst was (sort of) avoided.

IB Economics The Monetarist Model: "Markets Know Best"

Milton Friedman and his monetarist crew took one look at that and went, “You’re doing it wrong.” For them, long-term macroeconomic equilibrium always returns - no government intervention needed.

Their belief? Markets self-correct. If unemployment rises, wages will fall. Eventually, employers will start hiring again. The Long-Run Aggregate Supply (LRAS) curve is vertical at full employment (YF), and the market naturally will eventually return to that point.

Unemployment? That’s just natural unemployment - people between jobs or changing careers. It's not a crisis. It’s life.

The Monetarist Fix: Don’t Fix It!

In the monetarist view, government intervention and spending only makes things worse in the long run:

• It creates inflation.

• It adds public debt.

• It distorts incentives and crowds out private sector investment.

So what’s their solution? Supply-side policies:

• Improve education and training, adapt people's skills to the market

• Cut red tape and taxes

• Invest in technology and infrastructure

These shift the LRAS outwards - growing the economy without inflation.

IB Economics Real-life example: Singapore. Rather than throwing money at recessions, it focuses on training programmes, low taxes, and innovation incentives. The result? High growth, low inflation, and strong productivity.

So... Who’s Right?

It depends.

When COVID-19 struck, Keynesian tools were everywhere. Governments had to step in - furlough schemes, unemployment benefits, stimulus cheques. The free market alone wouldn’t have saved jobs in sectors like hospitality or airlines. Demand had evaporated. Wages didn’t “flex”. Intervention was essential.

But during boom years? Monetarists argue that central banks and governments should step back and let supply-side efficiency drive economic growth.

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Final Takeaway for your IB Economics Course (and what to write in your exam)

Monetarists Wages Sticky vs Keynesian Wages Flexible

Monetarists Government role Often harmful vs Keynesian Government role Essential in recessions

Monetarists Policy tools Supply-side only vs Keynesian Policy tools Fiscal and monetary

Monetarists Equilibrium Always returns to YF vs Keynesian Equilibrium Can occur below YF

Monetarists Real-world examples Singapore, Germany (long-term focus) vs Keynesian Real-world examples 2008 crisis, COVID-19

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IB Economics Story to Remember

Imagine a classroom. Students (workers) haven’t done their homework (output is down). The Keynesian teacher says, “Let’s give them chocolate (stimulus) and get them motivated!” The Monetarist teacher says, “Take away the chairs. When they get tired of standing, they’ll sit down and study.”

Whichever you agree with, just remember - in economics, assumptions shape the answers.

Stay well,