Monetarism vs Keynesian Economics
Monetarism and Keynesian Economics are two Economic Systems & Schools of Thought concepts in AP Economics that students often mix up. In short: monetarism is monetarism holds that the money supply is the main driver of inflation and economic activity, so central banks should control money growth steadily. Meanwhile, keynesian economics is keynesian economics holds that aggregate demand drives output in the short run and that government should use fiscal and monetary policy to fight recessions. Here is how they compare side by side.
Monetarism holds that the money supply is the main driver of inflation and economic activity, so central banks should control money growth steadily.
Led by Milton Friedman, it argues 'inflation is always and everywhere a monetary phenomenon' and favors stable, rules-based money growth over discretionary policy. It builds on the quantity theory of money.
Keynesian economics holds that aggregate demand drives output in the short run and that government should use fiscal and monetary policy to fight recessions.
Developed by John Maynard Keynes, it argues that economies can get stuck below full employment, so active demand management (spending and tax policy) is needed. It underpins the use of stimulus during downturns and the AD-AS model's short run.