The New Classical and Keynesian's Theory of Monetary Policy Coursework

The New Classical and Keynesian's Theory of Monetary Policy - Coursework Example The Curve supported the view that a high rate of unemployment went parallel with the low inflation rate. The notion was that when the demands for goods are high, companies would hire more workforce, leading to lower unemployment rates and would subsequently raise demand. Stagflation is characterized by both an increasing inflation as well as the unemployment rate. When stagflation occurred in the 1970s and the 1980s, there was a shift in the Phillip curve, and the Keynesians reassessed their theory. The Keynesians argued that the discrepancy in the results predicted by Phillips curve was because the curve was shifting in a north-easterly direction. The reason for the shift in the curve was considered to be because of the cut in wages and an increase in the costs of the businesses as a result of inflation. The idea was rejected by Keynesians in the start but has been incorporated into their theory over time. According to the Keynesian’s theory, the answer to the problem of stagflation was to refurbish the supply of materials. According to the theory, the way to make up for physical scarcity was to either to find a substitute for the resources that were scarce or to enhance the productivity and the efficiency in order to produce more output from the inputs. For instance, the challenge of oil scarcity of the late 1970s and the early 1980s was met by increasing the worldwide production of oil and by improving the efficiency of the processes so that more energy is conserved. Ultimately, the concept of NAIRU introduced to deal with the problem. The New Classical view supported the notion that monetary policy could not impact real output and employment. It was of the outlook that only nominal quantities can influence nominal variables like inflation. Since according to the view, unemployment and inflation are not related, its followers attribute inefficient government policies for lower rates of unemployment.