Keynesians believe that the interest rate is purely a function of supply of and demand for the money whereas the monetarists are of the view that it is a function of supply of and demand for the loanable funds only.
The Keynesians model assumes that a small change in the interest rate leads to a small change in the investment whereas the Monetarists’ model says that a small change in interest rate leads to a big change in investments.
Keynes had a narrow minded view of the market mechanism where he believed that government spending had a direct impact on the economy and on the level of employment. The Keynesians, therefore, prefer fiscal policy for reviving or slowing an economy. On the other hand, Friedman had a broader vision of the market mechanism and believed that money creation affects the spending in every direction of the economy. Hence, the Monetarists prefer the monetary policy for the interventions in the business cycles (Garrison, 1992).
At the same time, there were several similarities between the way Keynes and Friedman viewed the economy despite being each other’s opposites. Both of them were of the opinion that there were some financial forces present that could stabilize the economy without the inflation. They believed that the physical controls were hindrance to this effort and would cause the economy to deviate from the target.
It represents the fiscal policy because it changes the level and composition of taxes. Taxes are basically one of the basic tools of the fiscal policy. Fiscal policy uses the government expenditure and taxes to adjust the economy of a country. In this scenario, the revenue collection is being reduced by the government to cause an alteration in the aggregate demand and to achieve the aims of economic growth, price stability and full employment.
It represents the monetary policy.