Monetarists and Keynesians about inflation.

Monetarists’ view is based on the idea that the most influential factor of inflation is money supply. Government by using this instrument of monetary policy can change current inflation. If they increase money supply and so banks will be able to lend more and people will have more money to spend on goods and services and also on different financial assets; this might lead to a decrease in interest rates and so further increase in AD and so change in money supply can stimulate wealth effect and lead to a rise in inflationary pressure.
While Keynesians didn’t see strong relationship between money supply and inflation. They emphasized role of the AD in the economy and money supply is one of the determinants of AD. Their major concept was Phillips curve where they showed a trade off between inflation and unemployment and said that as inflation rises unemployment will reduce that’s why some inflation rate might be desirable for the economy. Keynesians said that government has to intervene in order to maintain low unemployment rate while classical economical approach chooses non-intervention. To downward inflationary pressure Keynesian economists accept some deflationary fiscal policies:
* Reducing the level of government expenditure
* Increasing taxation (either direct or indirect) to
discourage spending
* Increasing interest rates to discourage saving
* Reducing money supply growth