The basic tenet of monetarism is that a change in the money stock will, in the long run and all other things being equal, lead to a proportional increase in price level . Among others, monetarists assume that the velocity of money is relatively stable in the long run. In the Keynesian view, there is a trade off between employment and inflation as is reflected in the Phillips Curve that suggests that more inflation goes together with less unemployment.
Monetarists think this effect only exists in the short run and solely because workers and businesses confuse a change in price level with a change in real prices and wages . When business owners see their costs rise and their profits drop and workers see their costs of living rise and demand higher wages, unemployment rises again, so there is no trade off between employment and inflation in the long term .
The rational expectations theory is based on the efficient market hypothesis, which states that markets reflect all available information. The theory assumes that new information is absorbed rapidly by a large number of rational participants and that no participant has significant market power. Similarly, the rational expectations theory assumes that market participants base their expectations of the future, including future policy actions on past, present and projected future information . Government guarantees and support tend to increase moral hazard as market participants expect that the government will help them out.
Another example of how rational expectations work out in practise is the Greenspan Put. When during the tenure of Alan Greenspan a crisis arose and the stock market fell significantly, the Fed lowered the Federal Funds rate and added monetary liquidity to encourage risk taking in the financial markets. This was done to avert further deterioration like in the aftermath of the 1929 stock market crash . The actions of the FED reduced the risks of investing in financial markets but they also increased moral hazard as market participants started to count on FED support in times of crisis.
Supply-side economics argues that economic growth can be improved by lowering barriers for people to produce goods and services, such as lowering income tax and capital gains tax rates, and by allowing greater flexibility by reducing regulation. According to supply-side economics, consumers will then benefit from a greater supply of goods and services at lower prices. Supply-side economics proposes that production or supply is the key to economic prosperity and that consumption or demand is a secondary consequence. This idea is similar to Say's Law .
Supply-siders feel that in a high tax rate environment, lowering tax rates can raise revenue by causing more economic growth. Supply-side economics holds that increased taxation reduces trade between economic participants within a nation and that it discourages investment. Taxes act as a type of trade barrier or tariff that causes economic participants to revert to less efficient means of satisfying their needs, such as doing a job yourself instead of hiring a professional .
It is likely that lower taxes on labour will increase employment. For example, you can hire a contractor for a construction job or do the job yourself. Assume that the contractor can do the job twice as efficient as you can but he charges -- 40 per hour including taxes. If your net income after taxes is -- 15 per hour then it is cheaper to do the job yourself. In countries with high taxes on labour it is often worthwhile to take a leave and do a job yourself, even when a professional works more efficiently, simply because of the tax burden.
Austrian School of Economics
The Austrian School bases its analysis on the purposeful actions of individuals. Austrians seek to understand the economy by examining the consequences of individual choices. This approach differs significantly from many other schools of economic thought, which have placed less importance on individual actions and focused instead on aggregate variables, equilibrium analysis, and the consideration of societal groups rather than individuals . The Mises of the Austrian School of Economics branch contends that many economic problems are caused by government actions, which are seen as acts of coercion .