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Introduction to Macroeconomics: The Big Picture

Discussing the ideas of John Maynard Keynes and Milton Friedman.

Please address the following questions:

1. Compare and contrast the way Keynes and Friedman approach the economy. What are the key differences and similarities?

2. If Keynes argues for a role for government policies in the economy what is that role and why does Friedman argue against it?

3. Based on the ideas, explain with which of the two economists do you agree more and explain why.

Solution Preview

Looking at these two legends in a simplistic way seems to suggest that Keynes and Friedman were saying things contradictory to each other, but that is not really the case. In the simplest of frameworks Keynes' General Theory talks about how changes in spending and demand and changes in liquidity preference influence peoples' spending behavior; while Friedman talks about the role of prices, inflation, and managing money supply. While Keynes was of the view that the most important factor determining aggregate output was peoples' action, the government had an active role to play in the economy as a demand manager. He argued that the government should increase spending when people cut down and vice versa, thus arguing for a counter-cyclical policy. Friedman on the other hand said that the only thing that governments should be concerned with is how much purchasing power does money in peoples' ...