Monetary policy is enacted by a central bank that controls money supply that is circulating in the economy. This money supply influences inflation and interest rates that determine consumption level, employment rate and cost of debt. Expansionary monetary policy involves in buying treasury notes and declining interest rates on loans of central banks. These actions help in making the money supply to increase and making interest rates lower. This policy also makes consumption to be more attractive corresponding to savings.
Hayek’s explanation of an economy’s business cycle “The Austrian Business Cycle”: In his book “Prices and Production”, Hayek’s argued that any business cycle commence as a result of a monetary policy or approach that is adopted by governments. Hayek agreed with Adam’s Smith theory of free markets. He argued that despite the fact that markets evolved over time as a result of human actions, at a certain stage markets fail resulting in unemployment and inefficient allocation of resources. On analyzing the factors behind markets failure, Hayek suggested that the reason behind fluctuations in the stability of markets was the intervention of governments in the monetary equilibrium of economies. There he argued for a monetary approach to the origins
That's because legislators knew they must stop the worst recession since the Great Depression. Fiscal Policy vs. Monetary Policy Monetary policy is when a nation's central bank changes the money supply. It increases it with expansionary monetary policy and decreases it with contractionary monetary policy. It has many tools it can use, but it primarily relies on raising or lowering the fed funds rate. This benchmark rates then guides all other interest rates.
A second limitation of the Keynesian model is that it fails to take adequately into account the problem of inflation. Indeed, the basic model assumes that wages and prices are fixed and the only time we allowed them to rise was after the attainment of full employment. Experience in the 1970s in particular has shown us that high rates of inflation can coexist with high rates of unemployment and no adequate explanation of this is provided by the Keynesian theory Furthermore, the coincidence of inflation and unemployment
Keynes contrasted his approach to the aggregate supply, focused 'classical' economics that preceded his book. The interpretations of Keynes that followed are contentious and several schools of economic thought claim his legacy. Keynesian economists often argue that private sector decisions sometimes lead to inefficient macroeconomic outcomes which require active policy responses by the public sector, in particular, monetary policy actions by the central bank and fiscal policy actions by the government, in order to stabilize output over the business cycle.  Keynesian economics advocates a mixed economy – predominantly private sector, but with a role for government intervention during recessions. Keynesian economics served as the standard economic model in the developed nations during the later part of the Great Depression, World War II, and the post-war economic expansion
For instance, in Keen’s 2009 essay, “Mad, bad, and dangerous to know”, he makes this very claim. Keen’s general argument against Neoclassical theory is that the faith in the rationality of markets encourages deregulation of markets. It is important to note here that financial crises are almost always preceded by the deregulation of financial markets. To further develop this argument, consider the following two quotes from Herb Thompson’s article “Ignorance and ideological hegemony: A critique of neoclassical economics” “Neoclassical economists normally treat economic instability as the effect of exogenous, stochastic factors even though nonlinear economics suggests that what may previously have been considered exogenous, or random, may more likely be endogenous to capitalist social formations. As such, economic fluctuations are seen as created by the processes of capitalism itself” “Generally speaking, a nonlinear system must be understood in its totality, which means taking into account a variety of constraints, boundary conditions and initial conditions.
The economic system is done on two levels: microeconomics and macroeconomics. Microeconomics is the study of economics on a small scale, such as the individual behaviour in the economy markets (Davis, 2009). For example, microeconomics study will analyse how individuals respond to the incentives, the expenses of a firm or the household income. On the other hand, macroeconomics study of economics on a large scale usually the national economy (Investopedia, 2003). It analyse the national goals of the economy, such as maintaining full employment, stabilizing the economy or pursuing the economic growth.
His observation on Great Depression arose from the lack of ability to boost the aggregate demand. During the crisis period, economy could not achieve full employment balance, the supply could not create its own demand. At this point the main argument of Keynesian theory on economic crises is that economical shrinkages are generally arisen from the huge drops in the demand. Aggregate demand refers to sum of all consumptions, investments and public expenditures. In his opinion, state should increase the aggregate demand by applying some fiscal and monetary policies.
In 1946 economists Arthur F. Burns and Wesley C. Mitchell provided the now standard definition of business cycles,“Business cycles are a type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises: a cycle consists of expansions occurring at about the same time in many economic activities, followed by similarly general recessions, contractions, and revivals which merge into the expansion phase of the next cycle; in duration, business cycles vary from more than one year to ten or twelve years; they are not divisible into shorter cycles of similar characteristics with amplitudes approximating their own.” Common charecteristics of trade cycles The above definitions contain some common features and thus reveal some important characteristics of trade cycles. 1. Trade cycles essentially show movements in the economy, a wave-like movement is can be visualised showing an upward trend and a downward trend in the economy. 2. Trade cycles have various phases, periods of growth and rise followed by periods of stagnation.
According Hasnul, A.G. (2015) , in contrast, Keynesian hypothesis state that expansion of government expenditure accelerates economic growth. 3.1 BENEFITS OF GOVERNMENT SPENDING Government spending has been allocated to many components such as welfare benefits,