Final answer:
The Monetarist School of Thought attributes business cycle fluctuations to changes in the money supply and emphasizes government's role in controlling it, contrasting with Keynesian Economics, which advocates for active fiscal policy intervention. The monetarist approach gained attention during the 1970s inflation, while Keynesian principles were influential in maintaining stability during the 1960s.
Step-by-step explanation:
The Monetarist School of Thought in the context of business cycle theories attributes fluctuations primarily to changes in the money supply. Monetarists, who gained prominence particularly during the challenging economic conditions of the 1970s, argue that government's crucial role is to control the supply of money to stabilize the economy. The Federal Reserve's adoption of a monetarist policy in 1979, which brought on a deep recession, was an attempt to counter high inflation of the period with strict money supply controls.
By contrast, Keynesian Economics, founded on the principles of John Maynard Keynes, posits that active government intervention through fiscal policy is necessary to manage economic cycles. The Keynesian approach suggests using government spending and tax policies to influence aggregate demand and address recessionary or inflationary periods. This approach was viewed as highly influential in maintaining stable growth and prices during the 1960s.
However, during economic conditions like stagflation, when the economy faces both stagnation and inflation, the Keynesian model proved less effective, leading to the consideration of monetarism. Over time, there have been efforts to balance Keynesian and Neoclassical Models to achieve full employment and economic stability. Overall, the debate between monetarist and Keynesian approaches to the business cycle continues to inform economic policy-making.