it can be said that a doubling of the money supply must be associated with a doubling of the price level. Hence, the classical economists believe that a change in the supply of money would lead to a proportion change in the price leaving real variables unchanged.
Thus, from the above diagram an increase in money supply would shift the aggregate demand to the right at AD1 cause the price to increase from OP to OP1. Hence, the additional money supply causes the price of output to move in a proportional manner at full employment.
However, the classical approach did not last forever. Before the Great Depression was experienced, the classical doctrine was almost universally accepted by economist and policymakers; henceforth the classical approach has been given less importance.
凯恩斯主义做法——The Keynesian Approach
Keynes had argued that, in times of profound depression, monetary policy might be totally useless as a means of motivating aggregate demand. By the time of the Radcliffe Report in 1959, most Keynesian economists held the view that there was no fundamental link between quantity of money and aggregate demand. The Keynesian totally opposed the classical economist in the sense that an economy is always below full employment and supply responds to demand. At full capacity the supply curve would be vertical. Keynes believes that the link between money supply and real GDP are of reverse direction. This can be explained by an achievement of expansionary monetary policy where there is an increase in money supply. The latter will lead to a diminution in interest rate. Hence, discouraging people to put aside money and support people to take loan to benefit from low rate of interest. Therefore aggregate expenditure on investment and interest sensitive consumption goods generally increase. Thus, there will be too much money in movement in the economy which harms purchasing power causing real GDP to rise. Hence an expansionary monetary policy influences the real GDP unfavorably.
Keynes believes that the economy is proficient where the aggregate demand is equivalent to aggregate supply. There will be a condition of disequilibrium when there is surplus demand over supply. To bring that disequilibrium to equilibrium, an increase in money supply is needed which lead to an increase in price level. However, there will be a situation where the economy operating at full capacity. Therefore, the supply curve would be vertical. This can be demonstrated as follows:
货币主义方法——The Monetarist Approach
Monetarism is a macroeconomic theory stood of criticism of Keynesian economics. Nominal GDP is determined to some extent of the supply of money as well as the price level are the basics of the monetarist approach which are highly crucial in interpreting the monetarist. Milton Friedman is one of the economists that largely contribute to monetarism, thus known as the "Founding Father" of monetarism. It is much related with the classical school of thought. Much of the monetarist's theory is a progress of earlier classical theoretical work.
According to the monetarists, inflation is said to occur when the increased supply of money exceeds the rate of growth of national income. Obviously, there would be too much money in liquidation that must be restored by increasing the value of goods and services. Besides, changes in the rate of interest do not aff
