Keynesians believe a mass of economic decisions influences aggregate demand. Decades ago, a debate between economists became heated around the discussion of monetary and fiscal policy. At the time, Keynesians argued that monetary policy is not powerful. The Keynesian theory states that a change in aggregate demand will have the greatest effect on real output and employment in the short run. This is contrary to the belief that the effect is on prices. Keynesians used the Phillips Curve when inflation is increasing is when unemployment decrease. Keynesians also believe that what is accurate for short run may not be related to the long run. They believe monetary policy will only have a positive outcome when the prices are rigid. Changes in supply and demand are said to have a slow response from prices and wages. This resulting in shortages and surpluses in the economy. Milton Friedman even said, “under any conceivable institutional arrangements, and certainly under those that now prevail in the United States, there is only a limited amount of flexibility in prices and wages.” Even though that would be considered a Keynesian position …show more content…
Keynesians see unemployment as too variable, even though they understand the theoretical justification. Along with that Keynesians feel that periods of recession are trouble to the economy. Not all, but many, Keynesians support stabilization to reduce the scale of the business cycle. They see the business cycle as a major economic problem. However, this does not imply that Keynesians support fine-tuning. Fine-tuning is the adjustment of government spending and taxes, in other words fiscal policy. Keynesians focus on solving unemployment rather than inflation; they seem to be more aggressive towards implementing expansionary