Eco. 204 (2-2-2022-Online Discussion/Quiz 1—Understanding Monetarism and the Monetarist System)

Eze Queen Amarachi
2019/249427
Social science education (Education Economics)

MY name is AGBO ANNASTECIA ONYEDIKACHI I am a student of University of Nigeria nsukka in faculty of education department of social science education ( economics education).

A Monetarist is an economist who advocate Monetarism (also referred to as Monetarist Theory). Monetarism is defined as a fundamental macro economic theory that focuses on the importance of the money supply. A Monetarist support the doctrine that a nation’s economic system is controlled by the regulation of the money supply. Increasing money supply , according to the theory, leads to higher prices and inflation, while decrease in money supply leads to deflation and risks, causing inflation.
A Monetarist adopts the Monetary policy of the macro-economic policy tool. It is a tool implemented to adjust interest rates that, in turn, control the money supply. When interest rates are increased, people have more of an incentive to save than to spend, thereby reducing or contracting the money supply. Contrarily, when interest rates are lowered following an expansionary monetary scheme, the cost of borrowing decreases, which means people can borrow more and spend more, thereby stimulating the economy.
Famous Monetarist include Milton Friedman, Chair of Federal Reserve in the United States: Alan Greenspan and Prime Minister of the United Kingdom: Margaret Thatcher. Milton Friedman is recognised as the primary advocate of Monetarism. The Monetarist theory was explained at length by Friedman in a book he co-wrote with Anna Schwartz, “A Monetary History of the United States,1867-1960“. In 1963, Friedman argued that poor monetary policy by the U.S. central bank, the Federal Reserve, was the primary cause of the Great Depression in the United States in the 1930s. In their view, the failure of the Fed (as it is usually called) to offset forces that were putting downward pressure on the money supply and its actions to reduce the stock of money were the opposite of what should have been done. They also argued that because markets naturally move toward a stable center, an incorrectly set money supply caused markets to behave erratically.
Monetarism gained prominence in the 1970s. In 1979, with U.S. inflation peaking at 20 percent, the Fed switched its operating strategy to reflect monetarist theory.
Reference
CFI EDUCATION INC. Monetarist Theory. Last accessed 3 February 2022: https://corporatefinanceinstitute.com/resources/knowledge/economics/monetarist-theory/
OSIKHOTSALI MOMOH.(2021, July 25).Monetarism: https://www.investopedia.com/terms/m/monetarism.asp
THE INVESTOPEDIA TEAM.(2021, August 29). Monetary Policy: https://www.investopedia.com/terms/m/monetarypolicy.asp

Monetarist macro economic system
Monetarist theory, or monetarism, is an approach to economics that centers on the money supply (the amount of money in circulation, including not just coins and bills but also bank-account balances). The basic idea behind monetarist thinking is that the size of the money supply is more important than any other factor affecting the economy.It can also be defined as an economic concept that contends that changes in money supply are the most significant determinants of the rate of economic growth and the behavior of the business cycle. When monetarist theory works in practice, central banks, which control the levers of monetary policy, can exert much power over economic growth rates.
Now let me explain who a monetarist is, A monetarist is an economist who holds the strong belief that money supply—including physical currency, deposits, and credit—is the primary factor affecting demand in an economy. Consequently, the economy’s performance—its growth or contraction—can be regulated by changes in the money supply. The key driver behind this belief is the impact of inflation on an economy’s growth or health and the idea that by controlling the money supply, one can control the inflation rate.
Monetarism is an economic school of thought which states that the supply of money in an economy is the primary driver of economic growth. As the availability of money in the system increases, aggregate demand for goods and services goes up. An increase in aggregate demand encourages job creation, which reduces the rate of unemployment and stimulates economic growth.Monetary policy, an economic tool used in monetarism, is implemented to adjust interest rates that, in turn, control the money supply. When interest rates are increased, people have more of an incentive to save than to spend, thereby reducing or contracting the money supply. Contrarily, when interest rates are lowered following an expansionary monetary scheme, the cost of borrowing decreases, which means people can borrow more and spend more, thereby stimulating the economy.
Milton Friedman and Monetarism
Monetarism is closely associated with economist Milton Friedman, who argued, based on the quantity theory of money, that the government should keep the money supply fairly steady, expanding it slightly each year to allow for the natural growth of the economy. Due to the inflationary effects that can be brought about by the excessive expansion of the money supply, Friedman, who formulated the theory of monetarism, asserted that monetary policy should be done by targeting the growth rate of the money supply to maintain economic and price stability.In his book, A Monetary History of the United States 1867–1960, Friedman proposed a fixed growth rate called the K-percent rule, suggesting that money supply should grow at a constant annual rate tied to the growth of nominal gross domestic product (GDP) and be expressed as a fixed percentage per year. This way, the money supply will be expected to grow moderately, businesses will be able to anticipate the changes to the money supply every year and plan accordingly, the economy will grow at a steady rate, and inflation will be kept at low levels.
The Quantity Theory of Money
Central to monetarism is the “quantity theory of money,” which monetarists adopted from earlier economic theories and integrated into the general Keynesian framework of macroeconomics. The quantity theory of money can be summarized in the equation of exchange, formulated by John Stuart Mill, which states that the money supply, multiplied by the rate at which money is spent per year, equals the nominal expenditures in the economy. The formula is given as:
MV=PQ
where:
M=money supply
V=velocity (rate at which money changes hands)
P=average price of a good or service
Q=quantity of goods and services sold
​ A key point to note is that monetarists believe that changes to M (money supply) are the driver of the equation. In short, a change in M directly affects and determines employment, inflation (P), and production (Q). In the original version of the quantity theory of money, V is held to be constant, but this assumption was dropped by John Maynard Keynes and is not assumed by the monetarists, who instead believe that V is easily predictable.Economic growth is a function of economic activity (Q) and inflation (P). If V is constant (or at least predictable), then an increase (or decrease) in M will lead to an increase (or decrease) in either P or Q. An increase in P denotes that Q will remain constant, while an increase in Q means that P will be relatively constant. According to monetarism, variations in the money supply will affect price levels over the long term and economic output in the short term. A change in the money supply, therefore, will directly determine prices, production, and employment.
Monetarism is a macroeconomic school of thought that emphasizes (1) long-run monetary neutrality, (2) short-run monetary nonneutrality, (3) the distinction between real and nominal interest rates, and (4) the role of monetary aggregates in policy analysis. It is particularly associated with the writings of Milton Friedman, Anna Schwartz, Karl Brunner, and Allan Meltzer, with early contributors outside the United States including David Laidler, Michael Parkin, and Alan Walters. Some journalists—especially in the United Kingdom—have used the term to refer to doctrinal support of free-market positions more generally, but that usage is inappropriate; many free-market advocates would not dream of describing themselves as monetarists.

An economy possesses basic long-run monetary neutrality if an exogenous increase of Z percent in its stock of money would ultimately be followed, after all adjustments have taken place, by a Z percent increase in the general price level, with no effects on real variables (e.g., consumption, output, relative prices of individual commodities). While most economists believe that long-run neutrality is a feature of actual market economies, at least approximately, no other group of macroeconomists emphasizes this proposition as strongly as do monetarists. Also, some would object that, in practice, actual central banks almost never conduct policy so as to involve exogenous changes in the money supply. This objection is correct factually but irrelevant: the crucial matter is whether the supply and demand choices of households and businesses reflect concern only for the underlying quantities of goods and services that are consumed and produced. If they do, then the economy will have the property of longrun neutrality, and thus the above-described reaction to a hypothetical change in the money supply would occur.1 Other neutrality concepts, including the natural-rate hypothesis, are mentioned below.

Short-run monetary nonneutrality obtains, in an economy with long-run monetary neutrality, if the price adjustments to a change in money take place only gradually, so that there are temporary effects on real output (GDP) and employment. Most economists consider this property realistic, but an important school of macroeconomists, the so-called real business cycle proponents, denies it.

Continuing with our list, real interest rates are ordinary (“nominal”) interest rates adjusted to take account of expected inflation, as rational, optimizing people would do when they make trade-offs between present and future. As long ago as the very early 1800s, British banker and economist Henry Thornton recognized the distinction between real and nominal interest rates, and American economist Irving Fisher emphasized it in the early 1900s. However, the distinction was often neglected in macroeconomic analysis until monetarists began insisting on its importance during the 1950s. Many Keynesians did not disagree in principle, but in practice their models often did not recognize the distinction and/or they judged the “tightness” of monetary policy by the prevailing level of nominal interest rates. All monetarists emphasized the undesirability of combating inflation by nonmonetary means, such as wage and price controls or guidelines, because these would create market distortions. They stressed, in other words, that ongoing inflation is fundamentally monetary in nature, a viewpoint foreign to most Keynesians of the time.

Finally, the original monetarists all emphasized the role of monetary aggregates—such as M1, M2, and the monetary base—in monetary policy analysis, but details differed between Friedman and Schwartz, on the one hand, and Brunner and Meltzer, on the other. Friedman’s striking and famous recommendation was that, irrespective of current macroeconomic conditions, the stock of money should be made to grow “month by month, and indeed, so far as possible, day by day, at an annual rate of X per cent, where X is some number between 3 and 5.”2 Brunner and Meltzer also favored monetary policy rules but recognized the attractiveness of activist rules that relate money growth rates to prevailing economic conditions. Also, they typically concentrated on the monetary base, adjusted to reflect changes in reserve requirements, whereas Friedman was more concerned with M2 or M1 and, indeed, sought major changes in banking legislation, such as 100 percent reserve requirements on deposits, designed to make the chosen aggregate precisely controllable.

Friedman’s constant-money-growth rule, rather than other equally fundamental aspects of monetarism, attracted the most attention, thereby detracting from the understanding and appreciation of monetarism. In particular, this led to the comparative neglect of Friedman’s crucial “accelerationist” or “natural-rate” hypothesis, according to which there is no long-run trade-off between inflation and unemployment; that is, the long-run phillips curve is vertical. The no-trade-off view was also promoted by Brunner and Meltzer. Accordingly, it might be argued that the two fundamental monetarist propositions are (1) that cyclical movements in nominal income are primarily attributable to movements in the stock of money, and, (2) that there is no permanent trade-off between unemployment and inflation. Together, these lead to monetarist-style policy positions.

Monetarism’s rise to intellectual prominence began with writings on basic monetary theory by Friedman and other University of Chicago economists during the 1950s, writings that were influential because of their adherence to fundamental neoclassical principles. The most outstanding in this series was Friedman’s presidential address to the American Economic Association in 1967, published in 1968 as “The Role of Monetary Policy.” In this paper Friedman developed the natural-rate hypothesis (which he had clearly stated two years earlier) and used it as a pillar in the argument for a constant-growth-rate rule for monetary policy. Almost simultaneously, Edmund Phelps, who was not a monetarist, developed a similar no-trade-off theory, and, within a few years, events in the world economy apparently provided dramatic empirical support.

In the late 1970s and early 1980s, after a decade of increasing influence, monetarism’s reputation began to decline for three main reasons. One was the growing belief, based on plausible interpretations of experience, that money demand is in practice highly “unstable,” shifting significantly and unpredictably from one quarter to the next. The second was the rise of rational expectations economics, which split analysts antagonistic to Keynesian activism into distinct camps. (A majority of monetarists themselves soon embraced the rational expectations hypothesis.) The third was the Federal Reserve’s famous “monetarist experiment” of 1979–1982. The latter episode warrants an extended discussion.

​

Monetarist macro economic system
Monetarist theory, or monetarism, is an approach to economics that centers on the money supply (the amount of money in circulation, including not just coins and bills but also bank-account balances). The basic idea behind monetarist thinking is that the size of the money supply is more important than any other factor affecting the economy.It can also be defined as an economic concept that contends that changes in money supply are the most significant determinants of the rate of economic growth and the behavior of the business cycle. When monetarist theory works in practice, central banks, which control the levers of monetary policy, can exert much power over economic growth rates.
Now let me explain who a monetarist is, A monetarist is an economist who holds the strong belief that money supply—including physical currency, deposits, and credit—is the primary factor affecting demand in an economy. Consequently, the economy’s performance—its growth or contraction—can be regulated by changes in the money supply. The key driver behind this belief is the impact of inflation on an economy’s growth or health and the idea that by controlling the money supply, one can control the inflation rate.
Monetarism is an economic school of thought which states that the supply of money in an economy is the primary driver of economic growth. As the availability of money in the system increases, aggregate demand for goods and services goes up. An increase in aggregate demand encourages job creation, which reduces the rate of unemployment and stimulates economic growth.Monetary policy, an economic tool used in monetarism, is implemented to adjust interest rates that, in turn, control the money supply. When interest rates are increased, people have more of an incentive to save than to spend, thereby reducing or contracting the money supply. Contrarily, when interest rates are lowered following an expansionary monetary scheme, the cost of borrowing decreases, which means people can borrow more and spend more, thereby stimulating the economy.
Milton Friedman and Monetarism
Monetarism is closely associated with economist Milton Friedman, who argued, based on the quantity theory of money, that the government should keep the money supply fairly steady, expanding it slightly each year to allow for the natural growth of the economy. Due to the inflationary effects that can be brought about by the excessive expansion of the money supply, Friedman, who formulated the theory of monetarism, asserted that monetary policy should be done by targeting the growth rate of the money supply to maintain economic and price stability.In his book, A Monetary History of the United States 1867–1960, Friedman proposed a fixed growth rate called the K-percent rule, suggesting that money supply should grow at a constant annual rate tied to the growth of nominal gross domestic product (GDP) and be expressed as a fixed percentage per year. This way, the money supply will be expected to grow moderately, businesses will be able to anticipate the changes to the money supply every year and plan accordingly, the economy will grow at a steady rate, and inflation will be kept at low levels.
The Quantity Theory of Money
Central to monetarism is the “quantity theory of money,” which monetarists adopted from earlier economic theories and integrated into the general Keynesian framework of macroeconomics. The quantity theory of money can be summarized in the equation of exchange, formulated by John Stuart Mill, which states that the money supply, multiplied by the rate at which money is spent per year, equals the nominal expenditures in the economy. The formula is given as:
MV=PQ
where:
M=money supply
V=velocity (rate at which money changes hands)
P=average price of a good or service
Q=quantity of goods and services sold
​ A key point to note is that monetarists believe that changes to M (money supply) are the driver of the equation. In short, a change in M directly affects and determines employment, inflation (P), and production (Q). In the original version of the quantity theory of money, V is held to be constant, but this assumption was dropped by John Maynard Keynes and is not assumed by the monetarists, who instead believe that V is easily predictable.Economic growth is a function of economic activity (Q) and inflation (P). If V is constant (or at least predictable), then an increase (or decrease) in M will lead to an increase (or decrease) in either P or Q. An increase in P denotes that Q will remain constant, while an increase in Q means that P will be relatively constant. According to monetarism, variations in the money supply will affect price levels over the long term and economic output in the short term. A change in the money supply, therefore, will directly determine prices, production, and employment.
Monetarism is a macroeconomic school of thought that emphasizes (1) long-run monetary neutrality, (2) short-run monetary nonneutrality, (3) the distinction between real and nominal interest rates, and (4) the role of monetary aggregates in policy analysis. It is particularly associated with the writings of Milton Friedman, Anna Schwartz, Karl Brunner, and Allan Meltzer, with early contributors outside the United States including David Laidler, Michael Parkin, and Alan Walters. Some journalists—especially in the United Kingdom—have used the term to refer to doctrinal support of free-market positions more generally, but that usage is inappropriate; many free-market advocates would not dream of describing themselves as monetarists.

An economy possesses basic long-run monetary neutrality if an exogenous increase of Z percent in its stock of money would ultimately be followed, after all adjustments have taken place, by a Z percent increase in the general price level, with no effects on real variables (e.g., consumption, output, relative prices of individual commodities). While most economists believe that long-run neutrality is a feature of actual market economies, at least approximately, no other group of macroeconomists emphasizes this proposition as strongly as do monetarists. Also, some would object that, in practice, actual central banks almost never conduct policy so as to involve exogenous changes in the money supply. This objection is correct factually but irrelevant: the crucial matter is whether the supply and demand choices of households and businesses reflect concern only for the underlying quantities of goods and services that are consumed and produced. If they do, then the economy will have the property of longrun neutrality, and thus the above-described reaction to a hypothetical change in the money supply would occur.1 Other neutrality concepts, including the natural-rate hypothesis, are mentioned below.

Short-run monetary nonneutrality obtains, in an economy with long-run monetary neutrality, if the price adjustments to a change in money take place only gradually, so that there are temporary effects on real output (GDP) and employment. Most economists consider this property realistic, but an important school of macroeconomists, the so-called real business cycle proponents, denies it.

Continuing with our list, real interest rates are ordinary (“nominal”) interest rates adjusted to take account of expected inflation, as rational, optimizing people would do when they make trade-offs between present and future. As long ago as the very early 1800s, British banker and economist Henry Thornton recognized the distinction between real and nominal interest rates, and American economist Irving Fisher emphasized it in the early 1900s. However, the distinction was often neglected in macroeconomic analysis until monetarists began insisting on its importance during the 1950s. Many Keynesians did not disagree in principle, but in practice their models often did not recognize the distinction and/or they judged the “tightness” of monetary policy by the prevailing level of nominal interest rates. All monetarists emphasized the undesirability of combating inflation by nonmonetary means, such as wage and price controls or guidelines, because these would create market distortions. They stressed, in other words, that ongoing inflation is fundamentally monetary in nature, a viewpoint foreign to most Keynesians of the time.

Finally, the original monetarists all emphasized the role of monetary aggregates—such as M1, M2, and the monetary base—in monetary policy analysis, but details differed between Friedman and Schwartz, on the one hand, and Brunner and Meltzer, on the other. Friedman’s striking and famous recommendation was that, irrespective of current macroeconomic conditions, the stock of money should be made to grow “month by month, and indeed, so far as possible, day by day, at an annual rate of X per cent, where X is some number between 3 and 5.”2 Brunner and Meltzer also favored monetary policy rules but recognized the attractiveness of activist rules that relate money growth rates to prevailing economic conditions. Also, they typically concentrated on the monetary base, adjusted to reflect changes in reserve requirements, whereas Friedman was more concerned with M2 or M1 and, indeed, sought major changes in banking legislation, such as 100 percent reserve requirements on deposits, designed to make the chosen aggregate precisely controllable.

Friedman’s constant-money-growth rule, rather than other equally fundamental aspects of monetarism, attracted the most attention, thereby detracting from the understanding and appreciation of monetarism. In particular, this led to the comparative neglect of Friedman’s crucial “accelerationist” or “natural-rate” hypothesis, according to which there is no long-run trade-off between inflation and unemployment; that is, the long-run phillips curve is vertical. The no-trade-off view was also promoted by Brunner and Meltzer. Accordingly, it might be argued that the two fundamental monetarist propositions are (1) that cyclical movements in nominal income are primarily attributable to movements in the stock of money, and, (2) that there is no permanent trade-off between unemployment and inflation. Together, these lead to monetarist-style policy positions.

Monetarism’s rise to intellectual prominence began with writings on basic monetary theory by Friedman and other University of Chicago economists during the 1950s, writings that were influential because of their adherence to fundamental neoclassical principles. The most outstanding in this series was Friedman’s presidential address to the American Economic Association in 1967, published in 1968 as “The Role of Monetary Policy.” In this paper Friedman developed the natural-rate hypothesis (which he had clearly stated two years earlier) and used it as a pillar in the argument for a constant-growth-rate rule for monetary policy. Almost simultaneously, Edmund Phelps, who was not a monetarist, developed a similar no-trade-off theory, and, within a few years, events in the world economy apparently provided dramatic empirical support.

In the late 1970s and early 1980s, after a decade of increasing influence, monetarism’s reputation began to decline for three main reasons. One was the growing belief, based on plausible interpretations of experience, that money demand is in practice highly “unstable,” shifting significantly and unpredictably from one quarter to the next. The second was the rise of rational expectations economics, which split analysts antagonistic to Keynesian activism into distinct camps. (A majority of monetarists themselves soon embraced the rational expectations hypothesis.) The third was the Federal Reserve’s famous “monetarist experiment” of 1979–1982. The latter episode warrants an extended discussion.

​

Monetarist macro economic system
Monetarist theory, or monetarism, is an approach to economics that centers on the money supply (the amount of money in circulation, including not just coins and bills but also bank-account balances). The basic idea behind monetarist thinking is that the size of the money supply is more important than any other factor affecting the economy.It can also be defined as an economic concept that contends that changes in money supply are the most significant determinants of the rate of economic growth and the behavior of the business cycle. When monetarist theory works in practice, central banks, which control the levers of monetary policy, can exert much power over economic growth rates.
Now let me explain who a monetarist is, A monetarist is an economist who holds the strong belief that money supply—including physical currency, deposits, and credit—is the primary factor affecting demand in an economy. Consequently, the economy’s performance—its growth or contraction—can be regulated by changes in the money supply. The key driver behind this belief is the impact of inflation on an economy’s growth or health and the idea that by controlling the money supply, one can control the inflation rate.
Monetarism is an economic school of thought which states that the supply of money in an economy is the primary driver of economic growth. As the availability of money in the system increases, aggregate demand for goods and services goes up. An increase in aggregate demand encourages job creation, which reduces the rate of unemployment and stimulates economic growth.Monetary policy, an economic tool used in monetarism, is implemented to adjust interest rates that, in turn, control the money supply. When interest rates are increased, people have more of an incentive to save than to spend, thereby reducing or contracting the money supply. Contrarily, when interest rates are lowered following an expansionary monetary scheme, the cost of borrowing decreases, which means people can borrow more and spend more, thereby stimulating the economy.
Milton Friedman and Monetarism
Monetarism is closely associated with economist Milton Friedman, who argued, based on the quantity theory of money, that the government should keep the money supply fairly steady, expanding it slightly each year to allow for the natural growth of the economy. Due to the inflationary effects that can be brought about by the excessive expansion of the money supply, Friedman, who formulated the theory of monetarism, asserted that monetary policy should be done by targeting the growth rate of the money supply to maintain economic and price stability.In his book, A Monetary History of the United States 1867–1960, Friedman proposed a fixed growth rate called the K-percent rule, suggesting that money supply should grow at a constant annual rate tied to the growth of nominal gross domestic product (GDP) and be expressed as a fixed percentage per year. This way, the money supply will be expected to grow moderately, businesses will be able to anticipate the changes to the money supply every year and plan accordingly, the economy will grow at a steady rate, and inflation will be kept at low levels.
The Quantity Theory of Money
Central to monetarism is the “quantity theory of money,” which monetarists adopted from earlier economic theories and integrated into the general Keynesian framework of macroeconomics. The quantity theory of money can be summarized in the equation of exchange, formulated by John Stuart Mill, which states that the money supply, multiplied by the rate at which money is spent per year, equals the nominal expenditures in the economy. The formula is given as:
MV=PQ
where:
M=money supply
V=velocity (rate at which money changes hands)
P=average price of a good or service
Q=quantity of goods and services sold
​ A key point to note is that monetarists believe that changes to M (money supply) are the driver of the equation. In short, a change in M directly affects and determines employment, inflation (P), and production (Q). In the original version of the quantity theory of money, V is held to be constant, but this assumption was dropped by John Maynard Keynes and is not assumed by the monetarists, who instead believe that V is easily predictable.Economic growth is a function of economic activity (Q) and inflation (P). If V is constant (or at least predictable), then an increase (or decrease) in M will lead to an increase (or decrease) in either P or Q. An increase in P denotes that Q will remain constant, while an increase in Q means that P will be relatively constant. According to monetarism, variations in the money supply will affect price levels over the long term and economic output in the short term. A change in the money supply, therefore, will directly determine prices, production, and employment.
Monetarism is a macroeconomic school of thought that emphasizes (1) long-run monetary neutrality, (2) short-run monetary nonneutrality, (3) the distinction between real and nominal interest rates, and (4) the role of monetary aggregates in policy analysis. It is particularly associated with the writings of Milton Friedman, Anna Schwartz, Karl Brunner, and Allan Meltzer, with early contributors outside the United States including David Laidler, Michael Parkin, and Alan Walters. Some journalists—especially in the United Kingdom—have used the term to refer to doctrinal support of free-market positions more generally, but that usage is inappropriate; many free-market advocates would not dream of describing themselves as monetarists.

An economy possesses basic long-run monetary neutrality if an exogenous increase of Z percent in its stock of money would ultimately be followed, after all adjustments have taken place, by a Z percent increase in the general price level, with no effects on real variables (e.g., consumption, output, relative prices of individual commodities). While most economists believe that long-run neutrality is a feature of actual market economies, at least approximately, no other group of macroeconomists emphasizes this proposition as strongly as do monetarists. Also, some would object that, in practice, actual central banks almost never conduct policy so as to involve exogenous changes in the money supply. This objection is correct factually but irrelevant: the crucial matter is whether the supply and demand choices of households and businesses reflect concern only for the underlying quantities of goods and services that are consumed and produced. If they do, then the economy will have the property of longrun neutrality, and thus the above-described reaction to a hypothetical change in the money supply would occur.1 Other neutrality concepts, including the natural-rate hypothesis, are mentioned below.

Short-run monetary nonneutrality obtains, in an economy with long-run monetary neutrality, if the price adjustments to a change in money take place only gradually, so that there are temporary effects on real output (GDP) and employment. Most economists consider this property realistic, but an important school of macroeconomists, the so-called real business cycle proponents, denies it.

Continuing with our list, real interest rates are ordinary (“nominal”) interest rates adjusted to take account of expected inflation, as rational, optimizing people would do when they make trade-offs between present and future. As long ago as the very early 1800s, British banker and economist Henry Thornton recognized the distinction between real and nominal interest rates, and American economist Irving Fisher emphasized it in the early 1900s. However, the distinction was often neglected in macroeconomic analysis until monetarists began insisting on its importance during the 1950s. Many Keynesians did not disagree in principle, but in practice their models often did not recognize the distinction and/or they judged the “tightness” of monetary policy by the prevailing level of nominal interest rates. All monetarists emphasized the undesirability of combating inflation by nonmonetary means, such as wage and price controls or guidelines, because these would create market distortions. They stressed, in other words, that ongoing inflation is fundamentally monetary in nature, a viewpoint foreign to most Keynesians of the time.

Finally, the original monetarists all emphasized the role of monetary aggregates—such as M1, M2, and the monetary base—in monetary policy analysis, but details differed between Friedman and Schwartz, on the one hand, and Brunner and Meltzer, on the other. Friedman’s striking and famous recommendation was that, irrespective of current macroeconomic conditions, the stock of money should be made to grow “month by month, and indeed, so far as possible, day by day, at an annual rate of X per cent, where X is some number between 3 and 5.”2 Brunner and Meltzer also favored monetary policy rules but recognized the attractiveness of activist rules that relate money growth rates to prevailing economic conditions. Also, they typically concentrated on the monetary base, adjusted to reflect changes in reserve requirements, whereas Friedman was more concerned with M2 or M1 and, indeed, sought major changes in banking legislation, such as 100 percent reserve requirements on deposits, designed to make the chosen aggregate precisely controllable.

Friedman’s constant-money-growth rule, rather than other equally fundamental aspects of monetarism, attracted the most attention, thereby detracting from the understanding and appreciation of monetarism. In particular, this led to the comparative neglect of Friedman’s crucial “accelerationist” or “natural-rate” hypothesis, according to which there is no long-run trade-off between inflation and unemployment; that is, the long-run phillips curve is vertical. The no-trade-off view was also promoted by Brunner and Meltzer. Accordingly, it might be argued that the two fundamental monetarist propositions are (1) that cyclical movements in nominal income are primarily attributable to movements in the stock of money, and, (2) that there is no permanent trade-off between unemployment and inflation. Together, these lead to monetarist-style policy positions.

Monetarism’s rise to intellectual prominence began with writings on basic monetary theory by Friedman and other University of Chicago economists during the 1950s, writings that were influential because of their adherence to fundamental neoclassical principles. The most outstanding in this series was Friedman’s presidential address to the American Economic Association in 1967, published in 1968 as “The Role of Monetary Policy.” In this paper Friedman developed the natural-rate hypothesis (which he had clearly stated two years earlier) and used it as a pillar in the argument for a constant-growth-rate rule for monetary policy. Almost simultaneously, Edmund Phelps, who was not a monetarist, developed a similar no-trade-off theory, and, within a few years, events in the world economy apparently provided dramatic empirical support.

In the late 1970s and early 1980s, after a decade of increasing influence, monetarism’s reputation began to decline for three main reasons. One was the growing belief, based on plausible interpretations of experience, that money demand is in practice highly “unstable,” shifting significantly and unpredictably from one quarter to the next. The second was the rise of rational expectations economics, which split analysts antagonistic to Keynesian activism into distinct camps. (A majority of monetarists themselves soon embraced the rational expectations hypothesis.) The third was the Federal Reserve’s famous “monetarist experiment” of 1979–1982.

​

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Monetarism is a macroeconomics theory which states that governments can foster economic stability by targeting the growth rate of the money supply. Essentially, it is a set of views based on the belief that the total amount of money in an economy is the primary determinant of economic growth.
Monetarism is closely associated with economist Milton Friedman, who argued that the government should keep the money supply fairly steady, expanding it slightly each year mainly to allow for the natural growth of the economy.
Monetarism is a branch of Keynesian economics that emphasizes the use of monetary policy over fiscal policy to manage aggregate demand, contrary to most Keynesians.
The monetarist theory (also referred to as “monetarism”) is a fundamental macroeconomic theory that focuses on the importance of the money supply as a key economic force. Subscribers to the theory believe that money supply is a primary determinant of price levels and inflation.
Increasing money supply, according to the theory, inevitably leads to higher prices and inflation, while decreasing the money supply leads to deflation and risks, causing a recession.

Changes in the money supply also affect employment and production levels, but the monetarist theory asserts that those effects are only temporary, while the effect on inflation is more long-lasting and significant.

Monetarism is a macroeconomic theory which states that government can foster economic stability by targeting the growth rate of tge money supply. Monetarism is closely associated with economist Milton Friedman, who argued that government should keep the money supply fairly steady, expanding it slightly every year to allow for the natural growth of the economy.
The monetarist emphasizes the use of monetary policy to manage aggregate demand. Changes in money supply also affect employment and production levels, but monetarist asserts that those effects are only temporary, while the effect on inflation is more significant.

Monetarism is a macroeconomic school of thought that emphasizes (1) long-run monetary neutrality, (2) short-run monetary nonneutrality, (3) the distinction between real and nominal interest rates, and (4) the role of monetary aggregates in policy analysis. It is particularly associated with the writings of Milton Friedman, Anna Schwartz, Karl Brunner, and Allan Meltzer, with early contributors outside the United States including David Laidler, Michael Parkin, and Alan Walters. Some journalists—especially in the United Kingdom—have used the term to refer to doctrinal support of free-market positions more generally, but that usage is inappropriate; many free-market advocates would not dream of describing themselves as monetarists.
An economy possesses basic long-run monetary neutrality if an exogenous increase of Z percent in its stock of money would ultimately be followed, after all adjustments have taken place, by a Z percent increase in the general price level, with no effects on real variables (e.g., consumption, output, relative prices of individual commodities). While most economists believe that long-run neutrality is a feature of actual market economies, at least approximately, no other group of macroeconomists emphasizes this proposition as strongly as do monetarists
Short-run monetary nonneutrality obtains, in an economy with long-run monetary neutrality, if the price adjustments to a change in money take place only gradually, so that there are temporary effects on real output (GDP) and employment. Most economists consider this property realistic, but an important school of macroeconomists, the so-called real business cycle proponents, denies it.
Continuing with our list, real interest rates are ordinary (“nominal”) interest rates adjusted to take account of expected inflation, as rational, optimizing people would do when they make trade-offs between present and future. As long ago as the very early 1800s, British banker and economist Henry Thornton recognized the distinction between real and nominal interest rates, and American economist Irving Fisher emphasized it in the early 1900s
However, the distinction was often neglected in macroeconomic analysis until monetarists began insisting on its importance during the 1950s. Many Keynesians did not disagree in principle, but in practice their models often did not recognize the distinction and/or they judged the “tightness” of monetary policy by the prevailing level of nominal interest rates. All monetarists emphasized the undesirability of combating inflation by nonmonetary means, such as wage and price controls or guidelines, because these would create market distortions.

Finally, the original monetarists all emphasized the role of monetary aggregates—such as M1, M2, and the monetary base—in monetary policy analysis, but details differed between Friedman and Schwartz, on the one hand, and Brunner and Meltzer, on the other. Friedman’s striking and famous recommendation was that, irrespective of current macroeconomic conditions, the stock of money should be made to grow “month by month, and indeed, so far as possible, day by day, at an annual rate of X per cent, where X is some number between 3 and 5.”2 Brunner and Meltzer also favored monetary policy rules but recognized the attractiveness of activist rules that relate money growth rates to prevailing economic conditions. Also, they typically concentrated on the monetary base, adjusted to reflect changes in reserve requirements, whereas Friedman was more concerned with M2 or M1 and, indeed, sought major changes in banking legislation, such as 100 percent reserve requirements on deposits, designed to make the chosen aggregate precisely controllable.
Friedman’s constant-money-growth rule, rather than other equally fundamental aspects of monetarism, attracted the most attention, thereby detracting from the understanding and appreciation of monetarism. In particular, this led to the comparative neglect of Friedman’s crucial “accelerationist” or “natural-rate” hypothesis, according to which there is no long-run trade-off between inflation and unemployment; that is, the long-run phillips curve is vertical.
The no-trade-off view was also promoted by Brunner and Meltzer. Accordingly, it might be argued that the two fundamental monetarist propositions are (1) that cyclical movements in nominal income are primarily attributable to movements in the stock of money, and, (2) that there is no permanent trade-off between unemployment and inflation. Together, these lead to monetarist-style policy positions.
Monetarism’s rise to intellectual prominence began with writings on basic monetary theory by Friedman and other University of Chicago economists during the 1950s, writings that were influential because of their adherence to fundamental neoclassical principles.
The most outstanding in this series was Friedman’s presidential address to the American Economic Association in 1967, published in 1968 as “The Role of Monetary Policy.” In this paper Friedman developed the natural-rate hypothesis (which he had clearly stated two years earlier) and used it as a pillar in the argument for a constant-growth-rate rule for monetary policy. Almost simultaneously, Edmund Phelps, who was not a monetarist, developed a similar no-trade-off theory, and, within a few years, events in the world economy apparently provided dramatic empirical support.
In the late 1970s and early 1980s, after a decade of increasing influence, monetarism’s reputation began to decline for three main reasons. One was the growing belief, based on plausible interpretations of experience, that money demand is in practice highly “unstable,” shifting significantly and unpredictably from one quarter to the next. The second was the rise of rational expectations economics, which split analysts antagonistic to Keynesian activism into distinct camps. (A majority of monetarists themselves soon embraced the rational expectations hypothesis.) The third was the Federal Reserve’s famous “monetarist experiment” of 1979–1982.
In the late 1970s and early 1980s, after a decade of increasing influence, monetarism’s reputation began to decline for three main reasons. One was the growing belief, based on plausible interpretations of experience, that money demand is in practice highly “unstable,” shifting significantly and unpredictably from one quarter to the next. The second was the rise of rational expectations economics, which split analysts antagonistic to Keynesian activism into distinct camps. (A majority of monetarists themselves soon embraced the rational expectations hypothesis.) The third was the Federal Reserve’s famous “monetarist experiment” of 1979–1982. The latter episode warrants an extended discussion.
In the late 1970s and early 1980s, after a decade of increasing influence, monetarism’s reputation began to decline for three main reasons. One was the growing belief, based on plausible interpretations of experience, that money demand is in practice highly “unstable,” shifting significantly and unpredictably from one quarter to the next. The second was the rise of rational expectations economics, which split analysts antagonistic to Keynesian activism into distinct camps. (A majority of monetarists themselves soon embraced the rational expectations hypothesis.) The third was the Federal Reserve’s famous “monetarist experiment” of 1979–1982. The latter episode warrants an extended discussion.
In the late 1970s and early 1980s, after a decade of increasing influence, monetarism’s reputation began to decline for three main reasons. One was the growing belief, based on plausible interpretations of experience, that money demand is in practice highly “unstable,” shifting significantly and unpredictably from one quarter to the next. The second was the rise of rational expectations economics, which split analysts antagonistic to Keynesian activism into distinct camps. (A majority of monetarists themselves soon embraced the rational expectations hypothesis.) The third was the Federal Reserve’s famous “monetarist experiment” of 1979–1982.
During the 1970s, inflation rose in the United States, as well as in many other industrial nations, to levels unprecedented on a multiyear basis during periods of relative peace. This occurred as a consequence of various “shocks”—oil price increases, the Vietnam War, and especially the 1971–1973 demise of the Bretton Woods system of fixed exchange rates (itself caused largely by the failure of the United States to maintain the gold value of the dollar). This demise left central bankers with a major new responsibility; namely, to provide a nominal anchor for national fiat currencies to replace the gold standard.
In retrospect, the events that occurred from October 1979 to September 1982 are widely viewed as the crucial beginning of a necessary and successful attack on inflation that led, eventually, to the worldwide low-inflation environment of the 1990s. At the time, however, the “experiment” seemed anything but successful to many Americans. Short-term interest rates jumped dramatically in late 1979 under the tightened conditions, and 1980 witnessed a major fall in output in one quarter followed by a major jump in the next, due primarily to the imposition, and then removal, of credit controls. Finally, in 1981 and into the middle of 1982, a sustained period of monetary stringency brought about the deepest recession since the Great Depression of the 1930s and began to bring inflation down, more rapidly than many economists anticipated, toward acceptable values
What is left today of monetarism? While some disagreement remains, certain things are clear. Interestingly, most of the changes to Keynesian thinking that early monetarists proposed are accepted today as part of standard macro/monetary analysis. After all, the main proposed changes were to distinguish carefully between real and nominal variables, to distinguish between real and nominal interest rates, and to deny the existence of a long-run trade-off between inflation and unemployment. Also, most research economists today accept, at least tacitly, the proposition that monetary policy is more potent and useful than fiscal policy for stabilizing the economy. There is some academic support, and a bit in central bank circles, for the real-business-cycle suggestion that monetary policy has no important effect on real variables, but this idea probably has marginal significance. It is hard to believe that the major recession of 1981–1983 in the United States was not caused largely by the Fed’s deliberate.
Reference
Brunner, Karl, and Allan H. Meltzer. “An Aggregate Theory for a Closed Economy.” In Jerome L. Stein, ed., Monetarism. New York: American Elsevier, 1976.
Friedman, Milton. A Program for Monetary Stability. New York: Fordham University Press, 1959.
Friedman, Milton. “The Role of Monetary Policy.” American Economic Review 58 (March 1968): 1–17.
Friedman, Milton, and Anna J. Schwartz. A Monetary History of the United States, 1867–1960. Princeton: Princeton University Press, 1963.
McCallum, Bennett T. Monetary Economics: Theory and Policy. New York: Macmillan, 1989.
Symposium: “Monetarism: Lessons from the Post-1979 Experiment.” American Economic Review Papers and Proceedings 74 (May 1984): 382–400.
Taylor, John B., ed. Monetary Policy Rules. Chicago: University of Chicago Press,

MOETEKE EBELE LOUISA
2019/244608
Monetarist system is an economic school of thought that stresses the primary importance of the money supply in determining nominal GDP and the price level. It is an economic theory that says the money supply is the most important driver of economic growth. As the money supply increases, people demand more. Factories produce more, creating new jobs. The “Founding Father” of Monetarism is economist Milton Friedman. Monetarism is a theoretical challenge to Keynesian economics that increased in importance and popularity in the late 1960s and 1970s. In fact, the tide was so strong that in 1979 the Federal Reserve switched its operating strategy more in line with Monetarist theory, though they subsequently abandoned the strategy in 1982 for a number of reasons.
The challenge to the traditional Keynesian theory strengthened during the years of stagflation following the 1973 and 1979 oil shocks. Keynesian theory had no appropriate policy responses to the supply shocks. Inflation was high and rising through the 1970s and Friedman argued convincingly that the high rates of inflation were due to rapid increases in the money supply. He argued that the economy may be complicated, but stabilization policy does not have to be. The key to good policy was to control the supply of money.
People who believe in monetarist system warn that increasing the money supply only provides a temporary boost to economic growth and job creation. Over the long run, increasing the money supply increases inflation. As demand outstrips supply, prices will rise to match.
Monetarist theory views velocity as generally stable, which implies that nominal income is largely a function of the money supply. Variations in nominal income reflect changes in real economic activity (the number of goods and services sold) and inflation (the average price paid for them).
The quantity theory is the basis for several key tenets and prescriptions of monetary output.
1. Long-run monetary neutrality: An increase in the money stock would be followed by an increase in the general price level in the long run, with no effects on real factors such as consumption or output.
2. Short-run monetary non-neutrality: An increase in the stock of money has temporary effects on real output (GDP) and employment in the short run because wages and prices take time to adjust (they are sticky, in economic parlance).
3. Constant money growth rule: Friedman, who died in 2006, proposed a fixed monetary rule, which states that the Fed should be required to target the growth rate of money to equal the growth rate of real GDP, leaving the price level unchanged. If the economy is expected to grow at 2 percent in a given year, the Fed should allow the money supply to increase by 2 percent. The Fed should be bound to fixed rules in conducting monetary policy because discretionary power can destabilize the economy.
4. Interest rate flexibility: The money growth rule was intended to allow interest rates, which affect the cost of credit, to be flexible to enable borrowers and lenders to take account of expected inflation as well as the variations in real interest rates.

I share the same view as explained above that the total amount of money in an economy is the primary determinant of economic growth. As economist, effort should be geared to research on efdective strategies on how to expand the total amount of money in the economy.

NAME: UCHEAMA CALISTA NGOZI
REG. NO: 2019/243039
DEPARTMENT: ECONOMICS
COURSE: MACROECONOMICS II (ECO 204)
TOPIC: DISCUSS MONETARIST MACROECONOMIC SYSTEM

INTRODUCTION

Monetary policy, an economic tool used in monetarism, is implemented to adjust interest rates that, in turn, control the money supply. When interest rates are increased, people have more of an incentive to save than to spend, thereby reducing or contracting the money supply. Contrarily, when interest rates are lowered following an expansionary monetary scheme, the cost of borrowing decreases, which means people can borrow more and spend more, thereby stimulating the economy. Monetarism is an economic school of thought which states that the supply of money in an economy is the primary driver of economic growth. As the availability of money in the system increases, aggregate demand for goods and services goes up. An increase in aggregate demand encourages job creation, which reduces the rate of unemployment and stimulates economic growth.

The monetarist theory (also referred to as “monetarism”) is a fundamental macroeconomic theory that focuses on the importance of the money supply as a key economic force. Subscribers to the theory believe that money supply is a primary determinant of price levels and inflation. Increasing money supply, according to the theory, inevitably leads to higher prices and inflation, while decreasing the money supply leads to deflation and risks, causing a recession.
Changes in the money supply also affect employment and production levels, but the monetarist theory asserts that those effects are only temporary, while the effect on inflation is more long-lasting and significant.

Macroeconomic
Macroeconomics is a branch of economics that studies how an overall economy—the market or other systems that operate on a large scale behaves. Macroeconomics studies economy-wide phenomena such as inflation, price levels, rate of economic growth, national income, gross domestic product (GDP), and changes in unemployment.

Monetarist
The Monetarist school is a branch of Keynesian economics largely credited to the works of Milton Friedman. Working within and extending Keynesian models, Monetarists argue that monetary policy is generally a more effective and more desirable policy tool to manage aggregate demand than fiscal policy. Monetarists also acknowledge limits to monetary policy that make fine tuning the economy ill-advised and instead tend to prefer adherence to policy rules that promote stable rates of inflation.

Milton Friedman and Monetarism
Monetarism is closely associated with economist Milton Friedman, who argued, based on the quantity theory of money, that the government should keep the money supply fairly steady, expanding it slightly each year to allow for the natural growth of the economy. Due to the inflationary effects that can be brought about by the excessive expansion of the money supply, Friedman, who formulated the theory of monetarism, asserted that monetary policy should be done by targeting the growth rate of the money supply to maintain economic and price stability.

Monetarist Macroeconomic System
Milton Friedman updated the quantity theory of money to include a role for money demand. He argued that the role of money in the economy was sufficient to explain the Great Depression, and that aggregate demand oriented explanations were not necessary. Friedman also argued that monetary policy was more effective than fiscal policy; however, Friedman doubted the government’s ability to fine-tune the economy with monetary policy. He generally favored a policy of steady growth in money supply instead of frequent intervention (J Bullard, K Mitra).

Friedman also challenged the Phillips curve relationship between inflation and unemployment. Friedman and Edmund Phelps (who was not a monetarist) proposed an “augmented” version of the Phillips curve that excluded the possibility of a stable, long-run tradeoff between inflation and unemployment. When the oil shocks of the 1970s created a high unemployment and high inflation, Friedman and Phelps were vindicated. Monetarism was particularly influential in the early 1980s. Monetarism fell out of favor when central banks found it difficult to target money supply instead of interest rates as monetarists recommended. Monetarism also became politically unpopular when the central banks created recessions in order to slow inflation.

Macroeconomic policy is usually implemented through two sets of tools: fiscal and monetary policy. Both forms of policy are used to stabilize the economy, which can mean boosting the economy to the level of GDP consistent with full employment (Mayer, 2011). Macroeconomic policy focuses on limiting the effects of the business cycle to achieve the economic goals of price stability, full employment, and growth (Phillips Curve).

Summary
The monetarist theory, as popularized by Milton Friedman, asserts that money supply is the primary factor in determining inflation/deflation in an economy. According to the theory, monetary policy is a much more effective tool than the fiscal policy for stimulating the economy or slowing down the rate of inflation. Monetarist macroeconomic system is the primary alternative macroeconomic theory to Keynesian economic theory; monetarists believe in extremely limited government economic intervention, while Keynesians argue for active government intervention.

REFERENCES
Blanchard (2011). Macroeconomic theory, 582–83. http://www.macroeconomic_theory_sssb.dlb.ii.

Bullard, J., Mitra, K., (2002). Learning about monetary policy rules. Journal of monetary economics, Elsevier, Princeton
University Press, Princeton, New Jersey

Herianingrum, S., Syapriatama, I. (2016). Dual monetary system and macroeconomic performance in Indonesia. Journal Ekonomi Syariah, repository.unair.ac.id

Mayer (2011). AP Macroeconomics Review, 495. http://www.macroeconomic_system_and_monetary_policy…

Nakamura, Emi; Steinsson, Jón (2018). Identification in Macroeconomics. Journal of Economic Perspectives, 32 (3): 59–86. doi:10.1257/jep.32.3.59. ISSN 0895-3309. S2CID 44180952.

Phillips Curve (2018). The Concise Encyclopedia of Economics. Library of Economics and Liberty. http://www.econlib.org. Retrieved 2018-01-23.

Wray, L.R. (2015) Modern money theory: A primer on macroeconomics for sovereign monetary systems. books.google.com

Monetarism
By OSIKHOTSALI MOMOH Updated July 25, 2021
Reviewed by ERIC ESTEVEZ
Fact checked by DANIEL RATHBURN
What Is Monetarism?
Monetarism is a macroeconomic theory which states that governments can foster economic stability by targeting the growth rate of the money supply. Essentially, it is a set of views based on the belief that the total amount of money in an economy is the primary determinant of economic growth.

KEY TAKEAWAYS
Monetarism is a macroeconomic theory stating that governments can foster economic stability by targeting the growth rate of the money supply.
Central to monetarism is the quantity theory of money, which states that the money supply (M) multiplied by the rate at which money is spent per year (V) equals the nominal expenditures (P * Q) in the economy.
Monetarism is closely associated with economist Milton Friedman, who argued that the government should keep the money supply fairly steady, expanding it slightly each year mainly to allow for the natural growth of the economy.
Monetarism is a branch of Keynesian economics that emphasizes the use of monetary policy over fiscal policy to manage aggregate demand, contrary to most Keynesians.
Although most modern economists reject the emphasis on money growth that monetarists purported in the past, some core tenets of the theory have become a mainstay in nonmonetarist analysis.
Understanding Monetarism
Monetarism is an economic school of thought which states that the supply of money in an economy is the primary driver of economic growth. As the availability of money in the system increases, aggregate demand for goods and services goes up. An increase in aggregate demand encourages job creation, which reduces the rate of unemployment and stimulates economic growth.

Monetary policy, an economic tool used in monetarism, is implemented to adjust interest rates that, in turn, control the money supply. When interest rates are increased, people have more of an incentive to save than to spend, thereby reducing or contracting the money supply. Contrarily, when interest rates are lowered following an expansionary monetary scheme, the cost of borrowing decreases, which means people can borrow more and spend more, thereby stimulating the economy.

Milton Friedman and Monetarism
Monetarism is closely associated with economist Milton Friedman, who argued, based on the quantity theory of money, that the government should keep the money supply fairly steady, expanding it slightly each year to allow for the natural growth of the economy. Due to the inflationary effects that can be brought about by the excessive expansion of the money supply, Friedman, who formulated the theory of monetarism, asserted that monetary policy should be done by targeting the growth rate of the money supply to maintain economic and price stability.

In his book, A Monetary History of the United States 1867–1960, Friedman proposed a fixed growth rate called the K-percent rule, suggesting that money supply should grow at a constant annual rate tied to the growth of nominal gross domestic product (GDP) and be expressed as a fixed percentage per year. This way, the money supply will be expected to grow moderately, businesses will be able to anticipate the changes to the money supply every year and plan accordingly, the economy will grow at a steady rate, and inflation will be kept at low levels.

The Quantity Theory of Money
Central to monetarism is the “quantity theory of money,” which monetarists adopted from earlier economic theories and integrated into the general Keynesian framework of macroeconomics. The quantity theory of money can be summarized in the equation of exchange, formulated by John Stuart Mill, which states that the money supply, multiplied by the rate at which money is spent per year, equals the nominal expenditures in the economy. The formula is given as:




A key point to note is that monetarists believe that changes to M (money supply) are the driver of the equation. In short, a change in M directly affects and determines employment, inflation (P), and production (Q). In the original version of the quantity theory of money, V is held to be constant, but this assumption was dropped by John Maynard Keynes and is not assumed by the monetarists, who instead believe that V is easily predictable.

Economic growth is a function of economic activity (Q) and inflation (P). If V is constant (or at least predictable), then an increase (or decrease) in M will lead to an increase (or decrease) in either P or Q.

An increase in P denotes that Q will remain constant, while an increase in Q means that P will be relatively constant. According to monetarism, variations in the money supply will affect price levels over the long term and economic output in the short term. A change in the money supply, therefore, will directly determine prices, production, and employment.

Monetarism vs. Keynesian Economics
The view that velocity is constant is a source of contention among Keynesians, who believe that velocity should not be constant since the economy is volatile and subject to periodic instability. Instead, Keynes’ liquidity preference theory emphasizes how changes in money demand (and thus velocity) influence the price level and aggregate demand.

Monetarism builds on the Keynesian theory by assuming the same macroeconomic framework and integrating the equation of exchange (with V swinging cyclically, as Keynes argued), but instead focuses on the role played by money supply. Because they believe that V can be relatively easily predicted, monetarists argue that the equation of exchange could be resuscitated as an approach to stabilization policy, and they favor the use of monetary policy to do so.

Proponents of monetarism generally believe that controlling an economy through fiscal policy is a poor decision because it necessarily introduces microeconomic distortions that reduce economic efficiency. They prefer monetary policy as a tool to manage aggregate demand in a way that will be more neutral from a microeconomics standpoint and that avoids the deadweight losses and social costs that fiscal policy creates in market.

In general, monetary policy can be characterized as contractionary or expansionary. Contractionary monetary policy is when the Fed reduces inflation by raising the federal funds rate or decreasing the money supply. Expansionary monetary policy works by expanding the money supply faster than usual or lowering short-term interest rates.
In the years that followed, however, monetarism fell out of favor with many economists, as the link between different measures of money supply and inflation proved to be less clear than most monetarist theories had suggested. In addition, monetarism’s ability to explain the U.S. economy waned in the following decades. Many central banks today have stopped setting monetary targets and instead have adopted strict inflation targets.

Although most modern economists reject the emphasis on money growth that monetarists purported in the past, some core tenets of the theory have become a mainstay in nonmonetarist analysis. One of the most important of these ideas is that inflation cannot continue indefinitely without increases in the money supply. In addition, it is the responsibility (although not the primary goal) of the central bank to control inflation.

That being said, monetarist interpretations of past economic events are still relevant today. Ben Bernanke, former Fed Chairman, cited the work of Friedman in his decision to lower interest rates and increase the U.S. money supply in order to boost the economy during the global recession that began in 2007 in the United States.

Real-World Examples of Monetarism
In Friedman’s seminal work, A Monetary History of the United States, 1867–1960, which he wrote with fellow economist Anna Schwartz, the two economists argued that failed monetary policy executed by the Federal Reserve was responsible for the Great Depression in the U.S. in the 1930s. In the view of Friedman and Schwartz, the Fed failed to relieve downward pressure on the money supply, and their eventual actions to reduce the money supply were the opposite of what they should have done. According to Friedman and Schwartz, markets tend towards a stable center; markets will behave erratically if the money supply is not properly set.

Monetarist Theory
By WILL KENTON Updated March 23, 2021
Reviewed by CHARLES POTTERS
What Is Monetarist Theory?
The monetarist theory is an economic concept that contends that changes in money supply are the most significant determinants of the rate of economic growth and the behavior of the business cycle. When monetarist theory works in practice, central banks, which control the levers of monetary policy, can exert much power over economic growth rates.

The competing theory to the monetarist theory is Keynesian economics.

KEY TAKEAWAYS
According to monetarist theory, money supply is the most important determinant of the rate of economic growth.
It is governed by the MV = PQ formula, in which M = money supply, V = velocity of money, P = price of goods, and Q = quantity of goods and services.
The Federal Reserve controls money in the United States and uses three main levers—the reserve ratio, discount rate, and open market operations—to increase or decrease money supply in the economy.
Understanding Monetarist Theory
According to monetarist theory, if a nation’s supply of money increases, economic activity will increase—and vice versa.

Monetarist theory is governed by a simple formula: MV = PQ, where M is the money supply, V is the velocity (number of times per year the average dollar is spent), P is the price of goods and services and Q is the quantity of goods and services. Assuming constant V, when M is increased, either P, Q, or both P and Q rise.

General price levels tend to rise more than the production of goods and services when the economy is closer to full employment. When there is slack in the economy, Q will increase at a faster rate than P under monetarist theory.

In the U.S., the Federal Reserve (Fed) sets monetary policy without government interference. The Fed operates on a monetarist theory that focuses on maintaining stable prices (low inflation), promoting full employment, and achieving steady gross domestic product (GDP) growth.

Controlling Money Supply
In the U.S., it is the job of the Fed to control the money supply. The Fed has three main levers:

The reserve ratio: The percentage of reserves a bank is required to hold against deposits. A decrease in the ratio enables banks to lend more, thereby increasing the supply of money.
The discount rate: The interest rate the Fed charges commercial banks that need to borrow additional reserves. A drop in the discount rate will encourage a bank to borrow more from the Fed and therefore lend more to its customers.
Open market operations: Open market operations consist of buying and selling government securities. Buying securities from large banks increases the supply of money, while selling securities contracts decreases the money supply in the economy.
Example of Monetarist Theory
Former Federal Reserve Chair Alan Greenspan was a proponent of monetarist theory. During his initial years at the Fed in 1988, he increased interest rates, decreasing growth and raising inflation rates, which almost touched five percent.

The U.S. economy tipped into recession during the early 1990s. In response, Chair Greenspan boosted economic prospects by commencing on a rate-cutting spree that resulted in the longest period of economic expansion in the history of the U.S. economy. A loose monetary policy of low interest rates made the U.S. economy prone to bubbles, culminating in the 2008 financial crisis and the Great Recession.

Reference
OSIKHOTSALI MOMOH Updated July 25, 2021.
ERIC ESTEVEZ
DANIEL RATHBURN
By WILL KENTON Updated March 23, 2021
Reviewed by CHARLES POTTERS

Source
Investopedia.com

Ezeh Patrick Ezenwa
2019/244053

Monetarism according to Milton Friedman can be seen as a macroeconomic theory which states that governments can foster economic stability by targeting the growth rate of the money supply. Friedman argued that the government should keep the money supply fairly steady, that is expanding it slightly each year mainly to allow for the natural growth of the economy. It focuses on the importance of the money supply as a key economic force. Subscribers to the theory believe that money supply is a primary determinant of price levels and inflation. Increasing money supply, according to the theory, inevitably leads to higher prices and inflation, while decreasing the money supply leads to deflation and risks, causing a recession.
Changes in the money supply also affect employment and production levels, but the monetarist theory asserts that those effects are only temporary, while the effect on inflation is more long-lasting and significant.
Monetarism is also a branch of Keynesian economics that emphasizes the use of monetary policy over fiscal policy to manage aggregate demand, contrary to most Keynesians.
Although most modern economists reject the emphasis on money growth that monetarists purported in the past, some core tenets of the theory have become a mainstay in non-monetarist analysis.
Monetary policy, is an economic tool which is used in monetarism, is implemented to adjust interest rates that, in turn, control the money supply. When interest rates are increased, people have more of an incentive to save than to spend, thereby reducing or contracting the money supply. Contrarily, when interest rates are lowered following an expansionary monetary scheme, the cost of borrowing decreases, which means people can borrow more and spend more, thereby stimulating the economy.
Also central to monetarism is the “quantity theory of money,” which monetarists adopted from earlier economic theories and integrated into the general Keynesian framework of macroeconomics. The quantity theory of money can be summarized in the equation of exchange, formulated by John Stuart Mill, which states that the money supply, multiplied by the rate at which money is spent per year, equals the nominal expenditures in the economy. The formula is given as:
MV=PQ
Its important to note is that monetarists believe that changes to M (money supply) are the driver of the equation. In short, a change in M directly affects and determines employment, inflation (P), and production (Q). In the original version of the quantity theory of money, V is held to be constant, but this assumption was dropped by John Maynard Keynes and is not assumed by the monetarists, who instead believe that V is easily predictable.

Monetarism deals on the macroeconomic effects of the supply of money and the role of the central banking on an economic system. Monetarism is mainly associated with the works of Milton Friedman,who was among the generation of economists to accept Keynesian economics and criticize Keynes’s theory of fighting economic downturns using fiscal policy (government spending). Though he opposed the existence of the Federal Reserve, Friedman advocated, given its existence,a central bank policy aimed at keeping the growth of the money supply at a rate commensurate with the growth in productivity and demand for goods.(WIKIPEDIA).
It is a theory which states that government can foster economic stability by aiming the growth rate of the money supply rather than by engaging in discretionary monetary policy. The monetarists believes that the total amount of money in an economy is the primary determinant of economic growth.
According to Investopedia,it is an economic concept that contends that changes in money supply are the most significant determinant of the rate of economic growth and the behavior of the business cycle. This theory views velocity as generally stable which implies that nominal income is largely a function of the money supply. Variations in nominal income reflect changes in real economic activity ( the number of goods and services sold) and inflation (the average price paid for them).(INTERNATIONAL MONETARY FUND).

2018/245945
Izuagba Benjamin
izuagbabenjamin@gmail.com

Monetarism is an economic school of thought which states that the supply of money in an economy is the primary driver of economic growth. As the availability of money in the system increases, aggregate demand for goods and services goes up. An increase in aggregate demand encourages job creation, which reduces the rate of unemployment and stimulates economic growth
Economic tool such as monetary policy is been used to control interest rate,which in turn control money supply
According to Milton Friedman who argued that the government should keep the money supply fairly steady,for the natural expansion of the national economy,his argument was based on quantity theory of money
In his book, A Monetary History of the United States 1867–1960, Friedman proposed a fixed growth rate called the K-percent rule, suggesting that money supply should grow at a constant annual rate tied to the growth of nominal gross domestic product (GDP) and be expressed as a fixed percentage per year.
He went ahead to say that it will bring about a steady rise in the economy and businesses can be able to plan ahead with lower inflationary rates
The quantity theory of money can be summarized in the equation of exchange, formulated by John Stuart Mill, which states that the money supply, multiplied by the rate at which money is spent per year, equals the nominal expenditures in the economy. The formula is given as:

MV=PQ
where:
M=money supply
V=velocity (rate at which money changes hands)
P=average price of a good or service
Q=quantity of goods and services sold

A key point to note is that monetarists believe that changes to M (money supply) are the driver of the equation. In short, a change in M directly affects and determines employment, inflation (P), and production (Q). In the original version of the quantity theory of money, V is held to be constant, but this assumption was dropped by John Maynard Keynes and is not assumed by the monetarists, who instead believe that V is easily predictable.
Economic growth is a function of economic activity (Q) and inflation (P). If V is constant (or at least predictable), then an increase (or decrease) in M will lead to an increase (or decrease) in either P or Q.
An increase in P denotes that Q will remain constant, while an increase in Q means that P will be relatively constant. According to monetarism, variations in the money supply will affect price levels over the long term and economic output in the short term. A change in the money supply, therefore, will directly determine prices, production, and employment.

Tenets of moneterist system
Interest rate flexibility
Short-run monetary nonneutrality
Constant money growth rule
Long-run monetary neutrality

Monetarism is a macroeconomic theory which states that governments can foster economic stability by targeting the growth rate of the money supply. The government can increase economic growth by supply of more money in the economy. When the availability of money increases in the economy, aggregate demand for goods and services goes up. In this state there will be job creation and opportunities and the rate of unemployment will reduce.
Monetarism is also the supply of more money in the economy by the government to increase or improve the economic growth.
Monetary policy is an economic tool used in monetarism. Monetary policy is a set of actions available to a nation’s central bank to achieve sustainable economic growth by adjusting the money supply.
A monetarist is someone who believes an economy should be controlled predominantly by the supply of money. Some examples of monetarists are Milton Friedman and Alan Greenspan.
Monetarist theory is an economic concept that contends that changes in money supply are the most significant determinants of the rate of economic growth and behaviour of the business cycle. When monetarist theory works in practice, central banks, which control the levels of monetary policy, can exert much power over economic growth rates. According to monetarist theory, money supply is the most important determinant of the rate of economic growth.
It is governed by the MV=PQ formula, i n which M= money supply, V= velocity of money, P= price of goods, and Q= quantity of goods and services.
Economic growth is a function of economic activity (Q) and inflation (P). If V is constant (or at least predictable), then an increase (or decrease) in M will lead to an increase (or decrease) in either P or Q.
An increase in P denotes that Q will remain constant. According to monetarism, variations in the money supply will affect price levels over the long term and economic output in the short term. A change in the money supply, therefore, will directly determine prices, production and employment.
REFERENCE
CBN (1992). Monetary Policy Department:
http://www.cenbank.org:1Central Bank
of Nigeria Statistical Bulletin for
several issues:
http://www.cenbank.org/
https://www.investopedia.com/terms/m/monetar
ism.asp
Investopedia Encyclopedia (2021). Monetarism
and Monetarist Theory. Retrieved from
site date 3/02/2022.

OGBUEHI CHINAZAEKPERE ESTHER
ECONOMICS MAJOR
ECO 204 ASSIGNMENT
Monetarism is an economic theory that focuses on the macroeconomic effects of the supply of money and central banking. It is a school of thought that emphasizes long and short run monetary non-neutrality distinction between real and normal interest rates and the role of monetary aggregates in policy analysis. Thus system theory is particularly associated with American Economist Milton Friedman. In this system, economists hold the strong belief that money supply (including physical currency, deposits and credit) is the primary factor affecting demand in an economy.
Underlying the monetarist macroeconomic theory is the equation of exchange which is expressed as MV=PQ.
Where M= Supply of money
V= Velocity of turnover of money
P= Price level
Q= Qty of goods and services.
REFERENCES.
http://www.britannica.com/economics encyclopedia Britannica
http://www.investopedia.com
http://www.econlib.com
ECO 202 and 204 notes.

THE MONETARIST MACROECONOMIC SYSTEM AND THEIR TENETS

WHAT IS MONETARISM?
Monetarism is a macroeconomic theory which states that governments can foster economic stability by targeting the growth rate of the money supply. Essentially, it is a set of views based on the belief that the total amount of money in an economy is the primary determinant of economic growth.
Central to monetarism is the quantity theory of money, which states that the money supply (M) multiplied by the rate at which money is spent per year (V) equals the nominal expenditures (P * Q) in the economy.
Monetarism is closely associated with economist Milton Friedman, who argued that the government should keep the money supply fairly steady, expanding it slightly each year mainly to allow for the natural growth of the economy.
Monetarism is a branch of Keynesian economics that emphasizes the use of monetary policy over fiscal policy to manage aggregate demand, contrary to most Keynesians.
Although most modern economists reject the emphasis on money growth that monetarists purported in the past, some core tenets of the theory have become a mainstay in non monetarist analysis.

UNDERSTANDING MONETARISM
Monetarism is an economic school of thought which states that the supply of money in an economy is the primary driver of economic growth. As the availability of money in the system increases, aggregate demand for goods and services goes up. An increase in aggregate demand encourages job creation, which reduces the rate of unemployment and stimulates economic growth.
Monetary policy, an economic tool used in monetarism, is implemented to adjust interest rates that, in turn, control the money supply. When interest rates are increased, people have more of an incentive to save than to spend, thereby reducing or contracting the money supply. Contrarily, when interest rates are lowered following an expansionary monetary scheme, the cost of borrowing decreases, which means people can borrow more and spend more, thereby stimulating the economy.

The Quantity Theory of Money
Central to monetarism is the “quantity theory of money,” which monetarists adopted from earlier economic theories and integrated into the general Keynesian framework of macroeconomics. The quantity theory of money can be summarized in the equation of exchange, formulated by John Stuart Mill, which states that the money supply, multiplied by the rate at which money is spent per year, equals the nominal expenditures in the economy. The formula is given as:
MV=PQ
where:
M=money supply
V=velocity (rate at which money changes hands)
P=average price of a good or service
Q=quantity of goods and services sold
​
A key point to note is that monetarists believe that changes to M (money supply) are the driver of the equation. In short, a change in M directly affects and determines employment, inflation (P), and production (Q). In the original version of the quantity theory of money, V is held to be constant, but this assumption was dropped by John Maynard Keynes and is not assumed by the monetarists, who instead believe that V is easily predictable.
Economic growth is a function of economic activity (Q) and inflation (P). If V is constant (or at least predictable), then an increase (or decrease) in M will lead to an increase (or decrease) in either P or Q.

An increase in P denotes that Q will remain constant, while an increase in Q means that P will be relatively constant. According to monetarism, variations in the money supply will affect price levels over the long term and economic output in the short term. A change in the money supply, therefore, will directly determine prices, production, and employment.

HISTORY OF MONETARISM
Monetarism gained prominence in the 1970s, a decade characterized by high and rising inflation and slow economic growth. The policies of monetarism were responsible for bringing down inflation in the United States and the United Kingdom. After U.S. inflation peaked at 20% in 1979, the Fed switched its operating strategy to reflect monetarist theory. During this time period, economists, governments, and investors eagerly jumped at every new money supply statistic.

In general, monetary policy can be characterized as contractionary or expansionary. Contractionary monetary policy is when the Fed reduces inflation by raising the federal funds rate or decreasing the money supply. Expansionary monetary policy works by expanding the money supply faster than usual or lowering short-term interest rates.
In the years that followed, however, monetarism fell out of favor with many economists, as the link between different measures of money supply and inflation proved to be less clear than most monetarist theories had suggested. In addition, monetarism’s ability to explain the U.S. economy waned in the following decades. Many central banks today have stopped setting monetary targets and instead have adopted strict inflation targets.

Although most modern economists reject the emphasis on money growth that monetarists purported in the past, some core tenets of the theory have become a mainstay in non monetarist analysis. One of the most important of these ideas is that inflation cannot continue indefinitely without increases in the money supply. In addition, it is the responsibility (although not the primary goal) of the central bank to control inflation.

That being said, monetarist interpretations of past economic events are still relevant today. Ben Bernanke, former Fed Chairman, cited the work of Friedman in his decision to lower interest rates and increase the U.S. money supply in order to boost the economy during the global recession that began in 2007 in the United States.

REAL WORLD EXAMPLES OF MONETARISM
In Friedman’s seminal work, A Monetary History of the United States, 1867–1960, which he wrote with fellow economist Anna Schwartz, the two economists argued that failed monetary policy executed by the Federal Reserve was responsible for the Great Depression in the U.S. in the 1930s. In the view of Friedman and Schwartz, the Fed failed to relieve downward pressure on the money supply, and their eventual actions to reduce the money supply were the opposite of what they should have done. According to Friedman and Schwartz, markets tend towards a stable center; markets will behave erratically if the money supply is not properly set.

In 1979, when Paul Volcker became the Chairman of the Federal Reserve, he made combatting inflation the primary goal of the central bank. In keeping with Friedman and Schwartz’s recommendations, Volcker restricted the money supply in order to do this. He raised the federal funds rate to 20% in 1980. At this time, this strategy for fighting stagflation (high inflation combined with high unemployment and stagnant demand) was successful. Volcker’s policies drastically reduced the money supply, consumers stopped purchasing as much, and businesses stopped raising prices. However, while this caused inflation to greatly decline, it resulted in a big recession (the 1980-82 recession).

During the same time period, Britain was also struggling with severe inflation. When Margaret Thatcher was elected prime minister in 1979, she also implemented a set of monetarist policies to combat the rising prices in the country. By 1983, inflation in Britain had been halved, from 10% to 5%.

However, the popularity of monetarism was relatively brief. In the 1980s and 1990s, the link between the money supply and nominal GDP broke down; the quantity theory of money—the backbone of monetarism—was called into question and many economists who had recommended the policies of monetarism in the 1970s abandoned the approach.

THE MONETARIST THEORY
The monetarist theory is an economic concept that contends that changes in money supply are the most significant determinants of the rate of economic growth and the behavior of the business cycle. When monetarist theory works in practice, central banks, which control the levers of monetary policy, can exert much power over economic growth rates.

The competing theory to the monetarist theory is Keynesian economics.
According to monetarist theory, if a nation’s supply of money increases, economic activity will increase—and vice versa.
Monetarist theory is governed by a simple formula: MV = PQ, where M is the money supply, V is the velocity (number of times per year the average dollar is spent), P is the price of goods and services and Q is the quantity of goods and services. Assuming constant V, when M is increased, either P, Q, or both P and Q rise.
General price levels tend to rise more than the production of goods and services when the economy is closer to full employment. When there is slack in the economy, Q will increase at a faster rate than P under monetarist theory.

In the U.S., the Federal Reserve (Fed) sets monetary policy without government interference. The Fed operates on a monetarist theory that focuses on maintaining stable prices (low inflation), promoting full employment, and achieving steady gross domestic product (GDP) growth.

EXAMPLE OF MONETARIST THEORY
Former Federal Reserve Chair Alan Greenspan was a proponent of monetarist theory. During his initial years at the Fed in 1988, he increased interest rates, decreasing growth and raising inflation rates, which almost touched five percent.

The U.S. economy tipped into recession during the early 1990s. In response, Chair Greenspan boosted economic prospects by commencing on a rate-cutting spree that resulted in the longest period of economic expansion in the history of the U.S. economy. A loose monetary policy of low interest rates made the U.S. economy prone to bubbles, culminating in the 2008 financial crisis and the Great Recession.

THE BASIC TENETS OF MONETARISM
Monetarist theory views velocity as generally stable, which implies that nominal income is largely a function of the money supply. Variations in nominal income reflect changes in real economic activity (the number of goods and services sold) and inflation (the average price paid for them).

URAMA HAPPINESS CHIDERA
Reg no:2019/242283
Economics Education
Eco 204
Monetarism is the theory or practice of controlling the supply of money as the chief method of stabilizing the economy. According to Milton Friedman, Monetarism is an economic theory that focuses on the macroeconomic effect of the supply of money and central banking. Formulated by Milton Friedman, it argues that excessive expansion of the money supply is inherently inflationary and that monetary authorities should focus solely on maintaining price stability.
Monetarism school of economic thought that maintains that the money supply (the total amount of money in an economy, in the form of coin, currency and bank deposit) is the chief determination demand side of short run economics activities. American economist Milton Friedman is generally regarded as a montarism leading exponent. Friedman and other monetarist advocate a macroeconomic theory and policy that diverge significantly from those of the formerly dominant Keynesian school. The monetarist approach became known during the 1970’s and 80’s. The monetarist equation is expressed as MV=PQ where M is the supply of money, where V is the velocity at which many is been supplied in the country.
P is the average price level at which each of the goods and services is Sold and Q is the quantity of goods and services produced.
The equation MV=PQ explains that as money supply increases with a constant and predictable V one can expect an increase in either price or quantity. An increase in quantity means that price will remain relatively constant, whereas an increase in P will occur if there is no corresponding increase in the quantity increase in quantity of goods and services produced. Therefore when there is a change In money supply, it directly affect and determine production employment and price levels . The effects of changes in the money supply, however become manifest only after a significant period of time.
The monetarism theory also says the money supply is the most important driver of economic growth .As the money supply increases people demand more . Factories produce more and creating new jobs. The monetarist warns that increasing the money supply only provides a temporary boost to economic growth and Job creation . But in the long-run increasing money supply increases inflation, as demand outstrip supply, prices will rise to make a monetarist believe monetary policy is more effective than fiscal policy. Stimulus spending adds to the money supply, but it creates a deficit adding to a country’s sovereign debt. That would increase interest rate..

CHARACTERISTICS OF MONETARISM
The theoretical foundationis the quantity theory of money.
The economy is inherently stable. Market works well when left to themselves.
The fed should be bound to fixed rules in conducting monetary policy.
Fiscal policy y often a bad policy.
TENETS OF MONETARISM
The monetarist believe the economy is self regulating.
Changes in velocity and the money supply can change aggregate demand.
Changes in the velocity and the money supply will change the price level and the real GDP in the short run but only if the price level in the long run.
The monetarist believe monetary policy is more effective fiscal policy
They also said that central banks are more powerful than the government because they control the money supply
They also tend to watch real interest rates rather than normal rate
They view velocity as generally stable. Which implies that nominal income is largely a function of the money supply.

L.C. Anderson and K. Carlson (1970) “A Monetarist Model for Economic Stabilization”, Federal Reserve Bank of St Louis Review, Vol. 52 (4), p.7-25.

L.C. Anderson and J.L. Jordan (1968) “Monetary and Fiscal Actions: A test of their relative importance in economic stabilization”, Federal Reserve Bank of St. Louis Review, Vol. 50 (Nov), p.11-24.

A. Ando and F. Modigliani (1965) “The Relative Stability of Monetary Velocity and the Investment Multiplier”, American Economic Review, Vol. 55, p.693-728.

Chidozie Chinaemerem Trust
Social science Education
Education Economics
2019/241722

MONETARIST THEORY
What Is Monetarist Theory?
The monetarist theory is an economic concept that posits that changes in money supply are the most significant determinants of the rate of economic growth and the behavior of the business cycle. It is of the view that money supply is the most important driver of economic growth. As the money supply increases, people demand more. Factories produce more, creating new jobs. When monetarist theory works in practice, central banks, which control the levers of monetary policy, can exert much power over economic growth rates.According to monetarist theory, if a nation’s supply of money increases, economic activity will increase—and vice versa.
Milton Friedman is believed to be the father of Monetarism. He popularized the theory of monetarism in his 1967 address to the American Economic Association.
Monetarist theory is governed by a simple formula: MV = PQ, where M is the money supply, V is the velocity (number of times per year the average dollar is spent), P is the price of goods and services and Q is the quantity of goods and services. Assuming constant V, when M is increased, either P, Q, or both P and Q rise.The foundation of monetarism is the Quantity Theory of Money. The theory is an accounting identity—that is, it must be true. It says that the money supply multiplied by velocity (the rate at which money changes hands) equals nominal expenditures in the economy (the number of goods and services sold multiplied by the average price paid for them). As an accounting identity, this equation is uncontroversial. What is controversial is velocity. Monetarist theory views velocity as generally stable, which implies that nominal income is largely a function of the money supply. Variations in nominal income reflect changes in real economic activity (the number of goods and services sold) and inflation (the average price paid for them).
Several key tenets and prescriptions of monetarism:
1. Long-run monetary neutrality: An increase in the money stock would be followed by an increase in the general price level in the long run, with no effects on real factors such as consumption or output.­
2. Short-run monetary nonneutrality: An increase in the stock of money has temporary effects on real output (GDP) and employment in the short run because wages and prices take time to adjust (they are sticky, in economic parlance).­
3. Constant money growth rule: Friedman, who died in 2006, proposed a fixed monetary rule, which states that the Fed should be required to target the growth rate of money to equal the growth rate of real GDP, leaving the price level unchanged. If the economy is expected to grow at 2 percent in a given year, the Fed should allow the money supply to increase by 2 percent. The Fed should be bound to fixed rules in conducting monetary policy because discretionary power can destabilize the economy.­
4. Interest rate flexibility: The money growth rule was intended to allow interest rates, which affect the cost of credit, to be flexible to enable borrowers and lenders to take account of expected inflation as well as the variations in real interest rates.­
Many monetarists also believe that markets are inherently stable in the absence of major unexpected fluctuations in the money supply. They also assert that government intervention can often destabilize the economy more than help it. Monetarists also believe that there is no long-run trade-off between inflation and unemployment because the economy settles at long-run equilibrium at a full employment level of output.

REFERENCES
Kimberly Amado. (2021). Monetarism Explained. Retrieved February 4, 2022. https://www.thebalance.com/monetarism-and-how-it-works-3305866
Sarmat Jahard and Chris Papageorgin.(2014). What is Monetarism?: Finance and Development. Retrieved February 4, 2022. https://www.imf.org/external/pubs/ft/fandel/2014/03/basics.htm
Will Kenton. (2021). Monetarist Theory: What is Monetarism. Retrieved February 4 2022. https://www.investopedia.com/terms/m/monetaristtheory.asp

Name: Chibueze Manna Chioma
Course reg: 2019/244094
Department: Economics

Level: 200L

Assignment
Discuss Monetarist Macroeconomic System

Monetarist Macroeconomic System
Monetarism is a macroeconomic theory stating that governments can foster economic stability by targeting the growth rate of the money supply. Milton Friedman is the father of Monetarism or the Monetary Theory. Milton Friedman popularized the theory of monetarism in his 1967 address to the American Economic Association. He believed that money demand function is the most important stake function in macroeconomics and argued that the government should keep the money supply fairly steady, expanding it slightly each year mainly to allow for the natural growth of the economy. Monetarists forethought that increasing the money supply only provides a temporary boost to economic growth and job creation. Over the long run, increasing the money supply increases inflation. As demand outstrips supply, prices will rise to match. The belief is that if the Federal government were to properly manage the money supply and inflation, it would theoretically create a Goldilocks economy, where low unemployment and an acceptable level of inflation are prevalent.

Assumptions of the Monetarist System

●The antidote to inflation was higher interest rates, which in turn reduces the money supply. Prices then fall as people would have less money to spend. 
●Milton warned against increasing the money supply too fast, which would be counter-productive by creating inflation. But a gradual increase is necessary to prevent higher unemployment rates.
Friedman (and others) blamed the Federal government for the Great Depression. As the value of the dollar fell, the Fed tightened the money supply when it should have loosened it. They raised interest rates to defend the value of the dollar as people redeemed their paper currency for gold. Money supply dwindled, and loans became harder to get. The recession then worsened into a depression.
Monetarists believe monetary policy is more effective than fiscal policy (government spending and tax policy). Stimulus spending adds to the money supply, but it creates a deficit adding to a country’s sovereign debt. That could increase interest rates. Monetarists say that central banks are more powerful than the government because they control the money supply. They also tend to watch real interest rates rather than nominal rates. Most published rates are nominal rates, while real rates remove the effects of inflation. Real rates give a truer picture of the cost of money.
Friedman’s Modern Quantity Theory of Money

Friedman tried to find out why people choose to hold money instead of analyzing the specific motives for holding money as Keynes did. Friedman simply stated that the demand for money must be influenced by the same factors that influence the demand for any other asset. He then applied the theory asset demand for money. According to him, the demand for money should be function of the resources available to individuals (their wealth) the expected returns on other assets relative to the expected return on money. Like Keynes, Friedman recognized that people want holds certain amount of real money balances ( the quantity of money in real terms). Here, the demand for money is focused on what money can be used to achieve. It can be used as assets to regenerate or achieve or procure other services.

Md= f(rθ, rė, P, 1/p●dp/dt, w, W, U)

where, Md= money demand
rθ= return on investment
rė= return on capital
P= price level
1/p●dp/dt= rate on price as it changes overtime
w= ration on non- human changes on human changes overtime
W= wealth of household
U= tastes and preferences

Friedman’s concern was to show that velocity (demand for money) was a stable function of a limited number of key variables. His approach was to focus on the determinants of how much people will hold rather than the motive for holding more money. He viewed money as a kind of asset which yields the flow of service to its holders according to the function it p In 1956, Milton Friedman presented a performs. For example, money is one form of a number of forms in which people can choose to hold their wealth, since an individual can choose to hold durable goods/stocks as determined by key variables.

REFERENCES

Corporate Finance Institute. “Monetarism.”Sept. 9, 2020.
The Library of Economics and Liberty. “Monetarism.”Sept. 9, 2020.
Board of Governors of the Federal Reserve System. “What Is the Money Supply? Is It Important?” Accessed Sept. 9, 2020.
Board of Governors of the Federal Reserve System. “Transcript of Chairman Bernanke’s Press Conference, January 25, 2012,” Page 2. Accessed Sept. 9, 2020.
International Monetary Fund. “What Is Monetarism?” Accessed May 4, 2021.
Federal Reserve Bank of St. Louis. “Effective Federal Funds Rate.” Accessed May 5, 2021.
International Monetary Fund. “What Is Monetarism?” Accessed May 5, 2021.
.

Name: Aniukwu chisom Sylvia
Reg.No: 2019/243386
Department: Economics
course code/Title: Eco 204/Macroeconomic theory ll
Monetarist Macro Economic System
Monetarist macro economic system is a macroeconomic theory which states that governments can foster economic stability by targeting the growth rate of the money supply. Essentially, it is a set of views based on the belief that the total amount of money in an economy is the primary determinant of economic growth.As the availability of money in the system increases, aggregate demand for goods and services goes up. An increase in aggregate demand encourages job creation, which reduces the rate of unemployment and stimulates economic growth.
Monetarist theory asserts that variations in the money supply have major influences on national output in the short run and on price levels over longer periods. Monetarists assert that the objectives of monetary policy are best met by targeting the growth rate of the money supply rather than by engaging in discretionary monetary policy.Monetarism is commonly associated with neoliberalism.Monetarism,today is mainly associated with the work of Milton Friedman, who was among the generation of economists to accept Keynesian economics and then criticise Keynes’s theory of fighting economic downturns using fiscal policy (government spending). Friedman and Anna Schwartz wrote an influential book, A Monetary History of the United States, 1867–1960, and argued “inflation is always and everywhere a monetary phenomenon”.
Though he opposed the existence of the Federal Reserve,Friedman advocated, given its existence, a central bank policy aimed at keeping the growth of the money supply at a rate commensurate with the growth in productivity and demand for goods.
This theory draws its roots from two historically antagonistic schools of thought: the hard money policies that dominated monetary thinking in the late 19th century, and the monetary theories of John Maynard Keynes, who, working in the inter-war period during the failure of the restored gold standard, proposed a demand-driven model for money.While Keynes had focused on the stability of a currency’s value, with panics based on an insufficient money supply leading to the use of an alternate currency and collapse of the monetary system, Friedman focused on price stability.
The result was summarised in a historical analysis of monetary policy, Monetary History of the United States 1867–1960, which Friedman coauthored with Anna Schwartz. The book attributed inflation to excess money supply generated by a central bank. It attributed deflationary spirals to the reverse effect of a failure of a central bank to support the money supply during a liquidity crunch.Friedman originally proposed a fixed monetary rule, called Friedman’s k-percent rule, where the money supply would be automatically increased by a fixed percentage per year. Under this rule, there would be no leeway for the central reserve bank, as money supply increases could be determined “by a computer”, and business could anticipate all money supply changes.
With other monetarists he believed that the active manipulation of the money supply or its growth rate is more likely to destabilise than stabilise the economy.
History of the Monetarist Theory
While economist Clark Warburton initially posited much of the monetarist theory immediately following World War II, Milton Friedman is recognized as the primary advocate of modern-day monetarism. The monetarist theory was expounded by Friedman in a book he co-wrote with Anna Schwartz, “A Monetary History of the United States, 1867–1960,” and in a 1967 speech at the American Economic Association. lnterestingly, while the monetarist theory is essentially a guide for central bank policies, Friedman was opposed to the whole idea of central banks, such as the Federal Reserve Bank in the United States.
In fact, Friedman blamed much of the Great Depression of the 1930’s on the federal reserve . The Great Depression was a worldwide economic depression that took place from the late 1920s through the 1930s. For decades, debates went on about what caused the economic catastrophe, and economists remain split over a number of different schools of thought. of the 1930s on the Federal Reserve, arguing that the Fed tightened the money supply at the very moment that it should have been expanding it to stimulate economic growth. Given that central banks do exist, Friedman argued that monetary policy – the expansion or contraction of the money supply – is a much more effective tool for influencing the economy than fiscal policy – the government’s taxation and spending activities.
The Quantity Theory of Money
Central to monetarism is the “quantity theory of money,” which monetarists adopted from earlier economic theories and integrated into the general Keynesian framework of macroeconomics. The quantity theory of money can be summarized in the equation of exchange, formulated by John Stuart Mill, which states that the money supply, multiplied by the rate at which money is spent per year, equals the nominal expenditures in the economy. The formula is given as:
MV= PQ
where:
M= money supply
V = velocity(rate at which money changes hands)
P= average price of goods and services
Q = quantity of goods and services sold
key point to note is that monetarists believe that changes to M (money supply) are the driver of the equation. In short, a change in M directly affects and determines employment, inflation (P), and production (Q). In the original version of the quantity theory of money, V is held to be constant, but this assumption was dropped by John Maynard Keynes and is not assumed by the monetarists, who instead believe that V is easily predictable. Economic growth is a function of economic activity (Q) and inflation (P). If V is constant (or at least predictable), then an increase (or decrease) in M will lead to an increase (or decrease) in either P or Q.
An increase in P denotes that Q will remain constant, while an increase in Q means that P will be relatively constant. According to monetarism, variations in the money supply will affect price levels over the long term and economic output in the short term. A change in the money supply, therefore, will directly determine prices, production, and employment.
Monetarism vs. Keynesian Economics
The view that velocity is constant is a source of contention among Keynesians, who believe that velocity should not be constant since the economy is volatile and subject to periodic instability. Instead, Keynes’ liquidity preference theory emphasizes how changes in money demand (and thus velocity) influence the price level and aggregate demand.
Monetarism builds on the Keynesian theory by assuming the same macroeconomic framework and integrating the equation of exchange (with V swinging cyclically, as Keynes argued), but instead focuses on the role played by money supply. Because they believe that V can be relatively easily predicted, monetarists argue that the equation of exchange could be resuscitated as an approach to stabilization policy, and they favor the use of monetary policy to do so. Proponents of monetarism generally believe that controlling an economy through fiscal policy is a poor decision because it necessarily introduces microeconomic distortions that reduce economic efficiency. They prefer monetary policy as a tool to manage aggregate demand in a way that will be more neutral from a microeconomics standpoint and that avoids the deadweight losses and social costs that fiscal policy creates in markets.

Characteristics of monetarism
Monetarism is a mixture of theoretical ideas, philosophical beliefs, and policy prescriptions. Here we list the most important ideas and policy implications and explain them below.
* The theoretical foundation is the Quantity Theory of Money.
* The economy is inherently stable. Markets work well when left to themselves. Government intervention can often times destabilize things more than they help. Laissez faire is often the best advice.
* The Federal government should be bound to fixed rules in conducting monetary policy. They should not have discretion in conducting policy because they could make the economy worse off.
* Fiscal Policy is often bad policy.
Main Points or critical evaluation
There are several main points that the monetarist theory derives from the equation of exchange:
* An increase in the money supply will lead to overall price increases in the economy.
Increased money supply will result in only short-term effects on economic output (i.e., Gross Domestic Product – GDPGross Domestic Product (GDP)Gross domestic product (GDP) is a standard measure of a country’s economic health and an indicator of its standard of living. Also, GDP can be used to compare the productivity levels between different countries.) and employment levels.
* The best monetary policy for a central bank to follow is to peg the money supply’s growth rate to match the rate of growth of real GDP – it is the best policy to support continuing economic growth and keep the rate of inflation relatively low.
* The last point is the key to the monetarist theory. Monetarist economists believe that the central bank’s manipulation of the money supply should be restricted. They believe that a central bank that more actively attempts to change the money supply is more likely to harm the economy than to benefit it.
However, this contention may be heavily tied to the monetarists’ basic distrust of central banks as an institution. The idea runs counter to the Keynesian Economic Theory, which favors active, unrestricted intervention by the central bank.

References
^ a b Phillip Cagan, 1987. “Monetarism”, The New Palgrave: A Dictionary of Economics, v. 3, Reprinted in John Eatwell et al. (1989), Money: The New Palgrave, pp. 195–205, 492–97.
^ Friedman, Milton (2008). Monetary History of the United States, 1867-1960. Princeton University Press. ISBN 978-0691003542. OCLC 994352014.
^ Doherty, Brian (June 1995). “Best of Both Worlds”. Reason. Retrieved July 28, 2010.
^ Mankiw, N. Gregory. “Real Business Cycles: A New Keynesian Perspective”. Journal of Economic Perspectives 3.3 (1989): 79–90. Web.|date=October 2013
^ Bordo, Michael D. (1989). “The Contribution of A Monetury History”. Money, History, & International Finance: Essays in Honor of Anna J. Schwartz. The Increase in Reserve Requirements, 1936-37. University of Chicago Press. p. 46. CiteSeerX 10.1.1.736.9649. ISBN 0-226-06593-6. Retrieved 2019-07-25.
^ Thomas Palley (November 27, 2006). “Milton Friedman: The Great Conservative Partisan”. Retrieved June 20, 2013.
^ Ip, Greg; Whitehouse, Mark (2006-11-17). “How Milton Friedman Changed Economics, Policy and Markets”. The Wall Street Journal.
^ “Monetary Central Planning and the State, Part 27: Milton Friedman’s Second Thoughts on the Costs of Paper Money”. Archived from the original on November 14, 2012.
^ a b Friedman, Milton (1970). “A Theoretical Framework for Monetary Analysis”. Journal of Political Economy. 78 (2): 193–238 [p. 210]. doi:10.1086/259623. JSTOR 1830684.
^ Reichart Alexandre & Abdelkader Slifi (2016). ‘The Influence of Monetarism on Federal Reserve Policy during the 1980s.’ Cahiers d’économie Politique/Papers in Political Economy, (1), pp. 107–50. https://www.cairn.info/revue-cahiers-d-economie-politique-2016-1-page-107.htm
^ Milton Friedman; Anna Schwartz (2008). The Great Contraction, 1929–1933 (New Edition). Princeton University Press. ISBN 978-0-691-13794-0.

2019/244235
Chidubem Joshua

Monetarism is a school of thought in monetary economics that emphasizes the role of governments in controlling the amount of money in circulation.
Monetarism is closely associated with economist Milton Friedman, who argued, based on the quantity theory of money, that the government should keep the money supply fairly steady, expanding it slightly each year to allow for the natural growth of the economy
In his book, A Monetary History of the United States 1867–1960, Friedman proposed a fixed growth rate called the K-percent rule, suggesting that money supply should grow at a constant annual rate tied to the growth of nominal gross domestic product (GDP) and be expressed as a fixed percentage per year.
He went ahead to say that it will bring about a steady rise in the economy and businesses can be able to plan ahead with lower inflationary rates
John Stuart Mill, summarized the quantity theory of money in an equation called the
The equation of exchange which states that the money supply, multiplied by the rate at which money is spent per year, equals the nominal expenditures in the economy. The formula is given as:

MV=PQ
where:
M=money supply
V=velocity (rate at which money changes hands)
P=average price of a good or service
Q=quantity of goods and services sold
on

A key point to note is that monetarists believe that changes to M (money supply) are the driver of the equation. In short, a change in M directly affects and determines employment, inflation (P), and production (Q). In the original version of the quantity theory of money, V is held to be constant, but this assumption was dropped by John Maynard Keynes and is not assumed by the monetarists, who instead believe that V is easily predictable.
Economic growth is a function of economic activity (Q) and inflation (P). If V is constant (or at least predictable), then an increase (or decrease) in M will lead to an increase (or decrease) in either P or Q.
An increase in P denotes that Q will remain constant, while an increase in Q means that P will be relatively constant. According to monetarism, variations in the money supply will affect price levels over the long term and economic output in the short term. A change in the money supply, therefore, will directly determine prices, production, and employment.

Tenets of moneterist system
Interest rate flexibility
Short-run monetary nonneutrality
Constant money growth rule
Long-run monetary neutrality

Name: Anya-Awa Oma Ucheoma
Reg no: 2019/246475
Department: Combined social sciences (Economics/psychology)

Monetarism is a macroeconomic theory stating that governments can foster economic stability by targeting the growth rate of the money supply.
Monetary policy, an economic tool used in monetarism, is implemented to adjust interest rates that, in turn, control the money supply
Monetarism is closely associated with economist Milton Friedman, who argued, based on the quantity theory of money, that the government should keep the money supply fairly steady, expanding it slightly each year to allow for the natural growth of the economy
In his book, A Monetary History of the United States 1867–1960, Friedman proposed a fixed growth rate called the K-percent rule, suggesting that money supply should grow at a constant annual rate tied to the growth of nominal gross domestic product (GDP) and be expressed as a fixed percentage per year.
He went ahead to say that it will bring about a steady rise in the economy and businesses can be able to plan ahead with lower inflationary rates
John Stuart Mill, summarized the quantity theory of money in an equation called the
The equation of exchange which states that the money supply, multiplied by the rate at which money is spent per year, equals the nominal expenditures in the economy. The formula is given as:

MV=PQ
where:
M=money supply
V=velocity (rate at which money changes hands)
P=average price of a good or service
Q=quantity of goods and services sold
on

A key point to note is that monetarists believe that changes to M (money supply) are the driver of the equation. In short, a change in M directly affects and determines employment, inflation (P), and production (Q). In the original version of the quantity theory of money, V is held to be constant, but this assumption was dropped by John Maynard Keynes and is not assumed by the monetarists, who instead believe that V is easily predictable.
Economic growth is a function of economic activity (Q) and inflation (P). If V is constant (or at least predictable), then an increase (or decrease) in M will lead to an increase (or decrease) in either P or Q.
An increase in P denotes that Q will remain constant, while an increase in Q means that P will be relatively constant. According to monetarism, variations in the money supply will affect price levels over the long term and economic output in the short term. A change in the money supply, therefore, will directly determine prices, production, and employment.

Tenets of moneterist system
• Long-run monetary neutrality: An increase in the money stock would be followed by an increase in the general price level in the long run, with no effects on real factors such as consumption or output.­

• Short-run monetary non-neutrality: An increase in the stock of money has temporary effects on real output (GDP) and employment in the short run because wages and prices take time to adjust (they are sticky, in economic parlance).­

• Constant money growth rule: Friedman, who died in 2006, proposed a fixed monetary rule, which states that the Fed should be required to target the growth rate of money to equal the growth rate of real GDP, leaving the price level unchanged. If the economy is expected to grow at 2 percent in a given year, the Fed should allow the money supply to increase by 2 percent. The Fed should be bound to fixed rules in conducting monetary policy because discretionary power can destabilize the economy.­

• Interest rate flexibility: The money growth rule was intended to allow interest rates, which affect the cost of credit, to be flexible too.

Monetarism
Meaning: in simple terms ,it is the theory or practice of controlling the supply of money as the chief method of stabilizing the economy.
Monetarism is an economic theory that focuses on the macroeconomics effects of the supply of money and central banking .
This theory was formulated by an American economists Milton Friedman, it argue that excessive expansion of the money supply is inherently inflationary, and that monetary authorities should focus solely on maintaining price stability.
Monetarism or monetarist theory asserts that variations in the money supply have major influences on national output in the shor-run and on price levels over longer periods.
Monetarist policy consists of two essential items
1. The acceptance of a monetary aggregate by the monetary authorities as their primary target.
2. The adoption of policies directed at producing a stable and predictable rate of growth in that monetary aggregate.
The theory of Monetarism was propounded by Milton Friedman due to the inflationary effects that excessive expansion or circulation of the money supply .
Monetarism is also an economic school of thought which states that the supply of money in an economy is the primary driver of economic growth.
So as the availability of money in the system increases, aggregate demand for goods and services goes up.
An increase in aggregate demand encourages job creation, which reduces the rate of unemployment unemployment and stimulates economic growth.
Monetary policy, is an economic tool used in monetarism, is implemented to adjust interest rates that, in turn, control the money supply.
Monetarism is a macroeconomic theory stating that governments can foster economic stability by targeting the growth rate of the money supply.
Central to monetarism is the quantity theory of money, which states that the money supply (M) multiplied by the rate at which money is spent per year (V) equals the nominal expenditures (P * Q) in the economy.
Milton Friedman and Monetarism
Monetarism is closely associated with economist Milton Friedman, who argued, based on the quantity theory of money, that the government should keep the money supply fairly steady, expanding it slightly each year to allow for the natural growth of the economy. Due to the inflationary effects that can be brought about by the excessive expansion of the money supply, Friedman, who formulated the theory of monetarism, asserted that monetary policy should be done by targeting the growth rate of the money supply to maintain economic and price stability.

In his book, A Monetary History of the United States 1867–1960, Friedman proposed a fixed growth rate called the K-percent rule, suggesting that money supply should grow at a constant annual rate tied to the growth of nominal gross domestic product (GDP) and be expressed as a fixed percentage per year. This way, the money supply will be expected to grow moderately, businesses will be able to anticipate the changes to the money supply every year and plan accordingly, the economy will grow at a steady rate, and inflation will be kept at low levels.

The Quantity Theory of Money
Central to monetarism is the “quantity theory of money,” which monetarists adopted from earlier economic theories and integrated into the general Keynesian framework of macroeconomics. The quantity theory of money can be summarized in the equation of exchange, formulated by John Stuart Mill, which states that the money supply, multiplied by the rate at which money is spent per year, equals the nominal expenditures in the economy. The formula is given as:

\begin{aligned} &MV = PQ \\ &\textbf{where:} \\ &M = \text{money supply} \\ &V = \text{velocity (rate at which money changes hands)} \\ &P = \text{average price of a good or service} \\ &Q = \text{quantity of goods and services sold} \\ \end{aligned).
​

MV=PQ
where:
M=money supply
V=velocity (rate at which money changes hands)
P=average price of a good or service
Q=quantity of goods and services sold
​



A key point to note is that monetarists believe that changes to M (money supply) are the driver of the equation. In short, a change in M directly affects and determines employment, inflation (P), and production (Q). In the original version of the quantity theory of money, V is held to be constant, but this assumption was dropped by John Maynard Keynes and is not assumed by the monetarists, who instead believe that V is easily predictable.

Economic growth is a function of economic activity (Q) and inflation (P). If V is constant (or at least predictable), then an increase (or decrease) in M will lead to an increase (or decrease) in either P or Q.

An increase in P denotes that Q will remain constant, while an increase in Q means that P will be relatively constant. According to monetarism, variations in the money supply will affect price levels over the long term and economic output in the short term. A change in the money supply, therefore, will directly determine prices, production, and employment.

Monetarism vs. Keynesian Economics
The view that velocity is constant is a source of contention among Keynesians, who believe that velocity should not be constant since the economy is volatile and subject to periodic instability. Instead, Keynes’ liquidity preference theory emphasizes how changes in money demand (and thus velocity) influence the price level and aggregate demand.

Monetarism builds on the Keynesian theory by assuming the same macroeconomic framework and integrating the equation of exchange (with V swinging cyclically, as Keynes argued), but instead focuses on the role played by money supply. Because they believe that V can be relatively easily predicted, monetarists argue that the equation of exchange could be resuscitated as an approach to stabilization policy, and they favor the use of monetary policy to do so.

Proponents of monetarism generally believe that controlling an economy through fiscal policy is a poor decision because it necessarily introduces microeconomic distortions that reduce economic efficiency. They prefer monetary policy as a tool to manage aggregate demand in a way that will be more neutral from a microeconomics standpoint and that avoids the deadweight losses and social costs that fiscal policy creates in markets.

History of Monetarism
Monetarism gained prominence in the 1970s, a decade characterized by high and rising inflation and slow economic growth. The policies of monetarism were responsible for bringing down inflation in the United States and the United Kingdom. After U.S. inflation peaked at 20% in 1979, the Fed switched its operating strategy to reflect monetarist theory. During this time period, economists, governments, and investors eagerly jumped at every new money supply statistic.

In general, monetary policy can be characterized as contractionary or expansionary. Contractionary monetary policy is when the Fed reduces inflation by raising the federal funds rate or decreasing the money supply. Expansionary monetary policy works by expanding the money supply faster than usual or lowering short-term interest rates.
In the years that followed, however, monetarism fell out of favor with many economists, as the link between different measures of money supply and inflation proved to be less clear than most monetarist theories had suggested. In addition, monetarism’s ability to explain the U.S. economy waned in the following decades. Many central banks today have stopped setting monetary targets and instead have adopted strict inflation targets.

Although most modern economists reject the emphasis on money growth that monetarists purported in the past, some core tenets of the theory have become a mainstay in nonmonetarist analysis. One of the most important of these ideas is that inflation cannot continue indefinitely without increases in the money supply. In addition, it is the responsibility (although not the primary goal) of the central bank to control inflation.

That being said, monetarist interpretations of past economic events are still relevant today. Ben Bernanke, former Fed Chairman, cited the work of Friedman in his decision to lower interest rates and increase the U.S. money supply in order to boost the economy during the global recession that began in 2007 in the United States.1

Real-World Examples of Monetarism
In Friedman’s seminal work, A Monetary History of the United States, 1867–1960, which he wrote with fellow economist Anna Schwartz, the two economists argued that failed monetary policy executed by the Federal Reserve was responsible for the Great Depression in the U.S. in the 1930s. In the view of Friedman and Schwartz, the Fed failed to relieve downward pressure on the money supply, and their eventual actions to reduce the money supply were the opposite of what they should have done. According to Friedman and Schwartz, markets tend towards a stable center; markets will behave erratically if the money supply is not properly set.

In 1979, when Paul Volcker became the Chairman of the Federal Reserve, he made combatting inflation the primary goal of the central bank. In keeping with Friedman and Schwartz’s recommendations, Volcker restricted the money supply in order to do this. He raised the federal funds rate to 20% in 1980. At this time, this strategy for fighting stagflation (high inflation combined with high unemployment and stagnant demand) was successful. Volcker’s policies drastically reduced the money supply, consumers stopped purchasing as much, and businesses stopped raising prices. However, while this caused inflation to greatly decline, it resulted in a big recession (the 1980-82 recession).

During the same time period, Britain was also struggling with severe inflation. When Margaret Thatcher was elected prime minister in 1979, she also implemented a set of monetarist policies to combat the rising prices in the country. By 1983, inflation in Britain had been halved, from 10% to 5%.

However, the popularity of monetarism was relatively brief. In the 1980s and 1990s, the link between the money supply and nominal GDP broke down; the quantity theory of money—the backbone of monetarism—was called into question and many economists who had recommended the policies of monetarism in the 1970s abandoned the approach.23
What Is the K-Percent Rule?
The K-Percent Rule, proposed by economist Milton Friedman, states that the central bank should increase the money supply by a set percentage every year..
Who Is a Monetarist?
A monetarist is someone who believes an economy should be controlled predominantly by the supply of money.

Name: Chibueze Manna Chioma
Course reg: 2019/244094
Department: Economics
Level: 200L

Assignment
Discuss Monetarist Macroeconomic System

Monetarist Macroeconomic System
Monetarism is a macroeconomic theory stating that governments can foster economic stability by targeting the growth rate of the money supply. Milton Friedman is the father of Monetarism or the Monetary Theory. Milton Friedman popularized the theory of monetarism in his 1967 address to the American Economic Association. He believed that money demand function is the most important stake function in macroeconomics and argued that the government should keep the money supply fairly steady, expanding it slightly each year mainly to allow for the natural growth of the economy. Monetarists forethought that increasing the money supply only provides a temporary boost to economic growth and job creation. Over the long run, increasing the money supply increases inflation. As demand outstrips supply, prices will rise to match. The belief is that if the Federal government were to properly manage the money supply and inflation, it would theoretically create a Goldilocks economy, where low unemployment and an acceptable level of inflation are prevalent.

Assumptions of the Monetarist System

●The antidote to inflation was higher interest rates, which in turn reduces the money supply. Prices then fall as people would have less money to spend. 
●Milton warned against increasing the money supply too fast, which would be counter-productive by creating inflation. But a gradual increase is necessary to prevent higher unemployment rates.
Friedman (and others) blamed the Federal government for the Great Depression. As the value of the dollar fell, the Fed tightened the money supply when it should have loosened it. They raised interest rates to defend the value of the dollar as people redeemed their paper currency for gold. Money supply dwindled, and loans became harder to get. The recession then worsened into a depression.
Monetarists believe monetary policy is more effective than fiscal policy (government spending and tax policy). Stimulus spending adds to the money supply, but it creates a deficit adding to a country’s sovereign debt. That could increase interest rates. Monetarists say that central banks are more powerful than the government because they control the money supply. They also tend to watch real interest rates rather than nominal rates. Most published rates are nominal rates, while real rates remove the effects of inflation. Real rates give a truer picture of the cost of money.
Friedman’s Modern Quantity Theory of Money

Friedman tried to find out why people choose to hold money instead of analyzing the specific motives for holding money as Keynes did. Friedman simply stated that the demand for money must be influenced by the same factors that influence the demand for any other asset. He then applied the theory asset demand for money. According to him, the demand for money should be function of the resources available to individuals (their wealth) the expected returns on other assets relative to the expected return on money. Like Keynes, Friedman recognized that people want holds certain amount of real money balances ( the quantity of money in real terms). Here, the demand for money is focused on what money can be used to achieve. It can be used as assets to regenerate or achieve or procure other services.

Md= f(rθ, rė, P, 1/p●dp/dt, w, W, U)

where, Md= money demand
rθ= return on investment
rė= return on capital
P= price level
1/p●dp/dt= rate on price as it changes overtime
w= ration on non- human changes on human changes overtime
W= wealth of household
U= tastes and preferences

Friedman’s concern was to show that velocity (demand for money) was a stable function of a limited number of key variables. His approach was to focus on the determinants of how much people will hold rather than the motive for holding more money. He viewed money as a kind of asset which yields the flow of service to its holders according to the function it p In 1956, Milton Friedman presented a performs. For example, money is one form of a number of forms in which people can choose to hold their wealth, since an individual can choose to hold durable goods/stocks as determined by key variables.

REFERENCES

Corporate Finance Institute. “Monetarism.”Sept. 9, 2020.
The Library of Economics and Liberty. “Monetarism.”Sept. 9, 2020.
Board of Governors of the Federal Reserve System. “What Is the Money Supply? Is It Important?” Accessed Sept. 9, 2020.
Board of Governors of the Federal Reserve System. “Transcript of Chairman Bernanke’s Press Conference, January 25, 2012,” Page 2. Accessed Sept. 9, 2020.
International Monetary Fund. “What Is Monetarism?” Accessed May 4, 2021.
Federal Reserve Bank of St. Louis. “Effective Federal Funds Rate.” Accessed May 5, 2021.
International Monetary Fund. “What Is Monetarism?” Accessed May 5, 2021.
.

Agbo Stella Ukamaka
2016/237821
Economics/Philosophy
stellamk00@gmail.com

MONETARISM
Monetarism is a school of thought in monetary economics that emphasizes the role of governments in controlling the amount of money in circulation. The monetarist theory asserts that variations in the money supply have major influences on national output in the short run and on price levels over longer periods. Monetarists assert that the objectives of monetary policy are best met by targeting the growth rate of the money supply rather than by engaging in discretionary monetary policy. Monetarism is commonly associated with neoliberalism.
Concept of Monetarism
Monetarism today is mainly associated with the work of Milton Friedman, who was among the generation of economists to accept Keynesian economics and then criticise Keynes’s theory of fighting economic downturns using fiscal policy (government spending). Friedman and Anna Schwartz wrote an influential book, A Monetary History of the United States, 1867–1960, and argued “inflation is always and everywhere a monetary phenomenon”.
Monetarists are certain the money supply is what controls the economy, as their name implies. They believe that controlling the supply of money directly influences inflation and that by fighting inflation with the supply of money, they can influence interest rates in the future. Imagine adding more money to the current economy and the effects it would have on business expectations and the production of goods. Now imagine taking money away from the economy. What happens to supply and demand? At its most basic
The foundation of monetarism is the Quantity Theory of Money. The theory is an accounting identity that is, it must be true. It says that the money supply multiplied by velocity (the rate at which money changes hands) equals nominal expenditures in the economy (the number of goods and services sold multiplied by the average price paid for them). As an accounting identity, this equation is uncontroversial. What is controversial is velocity. Monetarist theory views velocity as generally stable, which implies that nominal income is largely a function of the money supply. Variations in nominal income reflect changes in real economic activity (the number of goods and services sold) and inflation (the average price paid for them).
The quantity theory is the basis for several key tenets and prescriptions of monetarism:
Long-run monetary neutrality: An increase in the money stock would be followed by an increase in the general price level in the long run, with no effects on real factors such as consumption or output.
Short-run monetary nonneutrality: An increase in the stock of money has temporary effects on real output (GDP) and employment in the short run because wages and prices take time to adjust (they are sticky, in economic parlance).
Constant money growth rule: Friedman, who died in 2006, proposed a fixed monetary rule, which states that the Fed should be required to target the growth rate of money to equal the growth rate of real GDP, leaving the price level unchanged. If the economy is expected to grow at 2 percent in a given year, the Fed should allow the money supply to increase by 2 percent. The Fed should be bound to fixed rules in conducting monetary policy because discretionary power can destabilize the economy.
Interest rate flexibility: The money growth rule was intended to allow interest rates, which affect the cost of credit, to be flexible to enable borrowers and lenders to take account of expected inflation as well as the variations in real interest rates.

Many monetarists also believe that markets are inherently stable in the absence of major unexpected fluctuations in the money supply. They also assert that government intervention can often destabilize the economy more than help it. Monetarists also believe that there is no long-run trade-off between inflation and unemployment because the economy settles at long-run equilibrium at a full employment level of output .
Money Supply
Monetarism has recently gone out of favor. Money supply has become a less useful measure of liquidity than in the past.
However, the money supply does not measure other assets, such as stocks, commodities and home equity. People are more likely to save money by investing in the stock market because they receive a better return.
That means the money supply does not measure these assets. If the stock market rises, people feel wealthy and are inclined to spend more. An increase in spending increases demands, which boosts the economy.
Stocks, commodities and home equity created economic booms that the Fed (the Federal Reserve) ignored. The Great Recession was fueled in part by the creation of a housing market bubble (home values rising, loans being approved for people who couldn’t afford them, and money being made by investors on the loans), which burst and took much of the economy with it.
How It Works
When the money supply expands, it lowers interest rates. This is due to banks having more to lend, so they are willing to charge lower rates. That means consumers borrow more to buy items like houses, automobiles, and furniture. Decreasing the money supply raises interest rates, making loans more expensive this slows economic growth.
Examples of Monetarism
Federal Reserve Chair Paul Volcker used the concept of monetarism to end stagflation (high inflation, high unemployment, and stagnant demand). By raising the federal funds rate to 20% in 1980, the money supply was reduced drastically, consumers stopped purchasing as much, and businesses stopped raising prices. That ended the out-of-control inflation, but it helped create the 1980-82 recession.
Former Fed Chair Ben Bernanke agreed with Milton’s suggestion that the Fed cultivate mild inflation. He was the first Fed chair to set an official inflation target of 2% year-over-year. He felt that a higher inflation rate would make it more difficult for consumers to make long-term spending decisions and a lower inflation rate could lead to deflation.
Conclusion
In the current environment of persistently low equilibrium real interest rates, the presence of an effective lower bound severely impairs the ability of standard interest-rate policy to achieve satisfying macroeconomic stabilisation outcomes. The new environment does, however, not render monetary stabilisation policy per se ineffective. An even stronger reduction in the stabilisation costs can be obtained when the central bank’s monetary policy strategy contains a make-up element so that monetary policy aims to compensate for past inflation shortfalls by generating temporarily above-target inflation in the future. The considered remedies to the distortions induced by the effective lower bound are of course not without practical limitations. The efficacy of asset purchases is likely to be state-dependent.
The severity of prevailing financial impairments, and central bank asset purchases may face quantitative limits. The stabilising macroeconomic effects of forward guidance hinge on its credibility with the private sector and on the importance of forward-looking private-sector planning, in general. While we have proposed a practical way to deal with these issues in our simulations, developing alternative approaches, with a stronger theoretical foundation, would be an important area for future work. In a similar vein, if a central bank decides to apdot a make-up strategy it may face practical challenges that we abstract from in our model-based analysis. The effectiveness of a make-up strategy hinges on people’s understanding of how it makes future monetary policy and macroeconomic outcomes contingent on current economic conditions. Coherent and transparent central bank communication of the strategy is therefore pivotal for the make-up element to steer private sector expectations in the desired way. This is likely to be particularly challenging in the initial transition phase when people still have to learn and build trust into the new strategy.

Macro economics
2019/249105
(Economics education)

The monetarist theory (also referred to as “monetarism”) is a fundamental macroeconomic theory that focuses on the importance of the money supply as a key economic force. the theory believe that money supply is a primary determinant of price levels and inflation.
Increasing money supply, according to the theory, inevitably leads to higher prices and inflation, while decreasing the money supply leads to deflation and risks, causing a recession.the competing theory to the monetarist theory is KEYNESIAN ECONOMICS.
monetarist theory is governed by a simple formula: MV = PQ, where M is the money supply, V is the velocity (number of times per year the average dollar is spent), P is the price of goods and services and Q is the quantity of goods and services. Assuming constant V, when M is increased, either P, Q, or both P and Q rise.General price levels tend to rise more than the production of goods and services when the economy is closer to full employment. When there is slack in the economy, Q will increase at a faster rate than P under monetarist theory.

Example of monetarist theory

Former Federal Reserve Chair Alan Greenspan was a proponent of monetarist theory. During his initial years at the Fed in 1988, he increased interest rates, decreasing growth and raising inflation rates, which almost touched five percent.
The U.S. economy tipped into recession during the early 1990s. In response, Chair Greenspan boosted economic prospects by commencing on a rate-cutting spree that resulted in the longest period of economic expansion of the history of the U.S. economy.

History of the monetarist theory

While economist Clark Warburton initially posited much of the monetarist theory immediately following World War II, Milton Friedman is recognized as the primary advocate of modern-day monetarism. The monetarist theory was expounded by Friedman in a book he co-wrote with Anna Schwartz, “A Monetary History of the United States, 1867–1960,” and in a 1967 speech at the American Economic Association.
lnterestingly, while the monetarist theory is essentially a guide for central bank policies, Friedman was opposed to the whole idea of central banks, such as the Federal Reserve Bank in the United States.
In fact, Friedman blamed much of the Great Depression of the 1930s on the Federal Reserve, arguing that the Fed tightened the money supply at the very moment that it should have been expanding it to stimulate economic growth iven that central banks do exist, Friedman argued that monetary policy – the expansion or contraction of the money supply – is a much more effective tool for influencing the economy than fiscal policy – the government’s taxation and spending activities.

How money supply affects the economy

The central bank of a country can expand or contract the money supply through the manipulation of interest rates.
For example, in the United States, the Federal Reserve can change the Fed Funds Rate – the interest rate at which banks can lend money overnight to other banks. The Fed funds rate affects all other interest rates in the economy.
When the Fed funds rate is higher, interest rates increase overall. It decreases the amount of money lent to businesses and consumers, thus reducing spending and economic growth. Conversely, lowering interest rates increases borrowing by consumers and businesses, thus boosting spending and stimulating economic growth.

The underlying equation

The central bank of a country can expand or contract the money supply through the manipulation of interest rates.
For example, in the United States, the Federal Reserve can change the Fed Funds Rate – the interest rate at which banks can lend money overnight to other banks. The Fed funds rate affects all other interest rates in the economy.
When the Fed funds rate is higher, interest rates increase overall. It decreases the amount of money lent to businesses and consumers, thus reducing spending and economic growth. Conversely, lowering interest rates increases borrowing by consumers and businesses, thus boosting spending and stimulating economic growth.
There is an underlying equation that forms the foundation of the monetarist theory. It is known as the “equation of exchange” (also referred to as the “quantity theory of money”). Although the equation’s become quite complex due to its expansion and refinement by recent economists, the basic equation is expressed as follows.

Monetarist theory equation=M x V =P x Q

Where:
M is the money supply
V is the velocity of money (the rate of turnover at which a single unit of currency – e.g., one dollar – is spent in one year)
P is the average price level for transactions in the economy (the purchase of goods and services)

 the total quantity of goods and services produced – i.e., economic output or production. According to the monetarist theory, V (the velocity of money) remains relatively stable. Therefore, it changes M (the money supply) that primarily affects prices and economic production.
Monetarist theory vs Keynesian

Monetarism spoused by Friedman, stands in contrast to the Keynesian Economic Theory, which rose to popularity in the 1930s. While monetarism focuses on monetary policy, Keynesian theory concentrates on fiscal policy.
Friedman argued that the errant monetary policy of the Federal Reserve was a primary cause of the Great Depression. Keynes believed that the fiscal policy of the government – increasing government spending – is the key factor in stimulating an economy that is in a recession.
Overall, Keynesian economists believe in active central bank and government intervention in the economy, while monetarists – such as Friedman – believe that free markets self-adjust in terms of prices and employment to provide the maximum benefit to the economy.
Monetarists are opposed to government intervention in the economy except on a very limited basis (believing that it typically does more harm than good), while Keynesian economists see the government and the central bank as primary drivers of economic well-being.

Name: Onyema Divine Oluchi
Reg No: 2019/244390
Department: Economics
Course: Macroeconomic Theory 2 Eco 204

The monetarist theory is an economic concept that contends that changes in money supply are the most significant determinants of the rate of economic growth and the behavior of the business cycle. When monetarist theory works in practice, central banks, which control the levers of monetary policy, can exert much power over economic growth rates.

Monetarism, school of economic thought that maintains that the money supply (the total amount of money in an economy, in the form of coin, currency, and bank deposits) is the chief determinant on the demand side of short-run economic activity. American economist Milton Friedman is generally regarded as monetarism’s leading exponent. Friedman and other monetarists advocate a macroeconomic theory and policy that diverge significantly from those of the formerly dominant Keynesian school. The monetarist approach became influential during the 1970s and early ’80s.

The monetarists believe that the direction of causation is from left to right in the equation; that is, as the money supply increases with a constant and predictable V, one can expect an increase in either P or Q. An increase in Q means that P will remain relatively constant, while an increase in P will occur if there is no corresponding increase in the quantity of goods and services produced. In short, a change in the money supply directly affects and determines production, employment, and price levels. The effects of changes in the money supply, however, become manifest only after a significant period of time.

One monetarist policy conclusion is the rejection of fiscal policy in favour of a “monetary rule.”Friedman contended that the government should seek to promote economic stability, but only by controlling the rate of growth of the money supply. It could achieve this by following a simple rule that stipulates that the money supply be increased at a constant annual rate tied to the potential growth of gross domestic product (GDP) and expressed as a percentage (e.g., an increase from 3 to 5 percent).

Monetarism thus posited that the steady, moderate growth of the money supply could in many cases ensure a steady rate of economic growth with low inflation. Monetarism’s linking of economic growth with rates of increase of the money supply was proved incorrect, however, by changes in the U.S. economy during the 1980s. First, new and hybrid types of bank deposits obscured the kinds of savings that had traditionally been used by economists to calculate the money supply. Second, a decline in the rate of inflation caused people to spend less, which thereby decreased velocity (V). These changes diminished the ability to predict the effects of money growth on growth of nominal GDP.

History of Monetarism
Monetarism gained prominence in the 1970s, a decade characterized by high and rising inflation and slow economic growth. The policies of monetarism were responsible for bringing down inflation in the United States and the United Kingdom. After U.S. inflation peaked at 20% in 1979, the Fed switched its operating strategy to reflect monetarist theory. During this time period, economists, governments, and investors eagerly jumped at every new money supply statistic.
In the years that followed, however, monetarism fell out of favour with many economists, as the link between different measures of money supply and inflation proved to be less clear than most monetarist theories had suggested. In addition, monetarism’s ability to explain the U.S. economy waned in the following decades. Many central banks today have stopped setting monetary targets and instead have adopted strict inflation targets.

Although most modern economists reject the emphasis on money growth that monetarists purported in the past, some core tenets of the theory have become a mainstay in nonmonetarist analysis. One of the most important of these ideas is that inflation cannot continue indefinitely without increases in the money supply. In addition, it is the responsibility (although not the primary goal) of the central bank to control inflation.

That being said, monetarist interpretations of past economic events are still relevant today. Ben Bernanke, former Fed Chairman, cited the work of Friedman in his decision to lower interest rates and increase the U.S. money supply in order to boost the economy during the global recession that began in 2007 in the United States.

While economist Clark Warburton initially posited much of the monetarist theory immediately following World War II, Milton Friedman is recognized as the primary advocate of modern-day monetarism. The monetarist theory was expounded by Friedman in a book he co-wrote with Anna Schwartz, “A Monetary History of the United States, 1867–1960,” and in a 1967 speech at the American Economic Association.

Interestingly, while the monetarist theory is essentially a guide for central bank policies, Friedman was opposed to the whole idea of central banks, such as the Federal Reserve Bank in the United States.

In fact, Friedman blamed much of the Great Depression of the 1930s on the Federal Reserve, arguing that the Fed tightened the money supply at the very moment that it should have been expanding it to stimulate economic growth.

Given that central banks do exist, Friedman argued that monetary policy – the expansion or contraction of the money supply – is a much more effective tool for influencing the economy than fiscal policy – the government’s taxation and spending activities.
According to monetarist theory, if a nation’s supply of money increases, economic activity will increase—and vice versa.

Monetarist theory is governed by a simple formula: MV = PQ, where M is the money supply, V is the velocity (number of times per year the average dollar is spent), P is the price of goods and services and Q is the quantity of goods and services. Assuming constant V, when M is increased, either P, Q, or both P and Q rise.
General price levels tend to rise more than the production of goods and services when the economy is closer to full employment. When there is slack in the economy, Q will increase at a faster rate than P under monetarist theory.

Principles/ tenets of monetarist macroeconomic system

One principle is that monetary policy should be well understood and systematic. The objectives of monetary policy should be stated clearly and communicated to the public. The Congress has directed the Federal Reserve to use monetary policy to promote both maximum employment and price stability; those are the objectives of U.S. monetary policy.

A second principle is that the central bank should provide monetary policy stimulus when economic activity is below the level associated with full resource utilization and inflation is below its stated goal. Conversely, the central bank should implement restrictive monetary policy when the economy is overheated and inflation is above its stated goal. In some circumstances, the central bank should follow this principle in a preemptive manner. For example, economic developments such as a large, unanticipated change in financial conditions might not immediately alter inflation and employment but would do so in the future and thus might call for a prompt, forward-looking policy response.

A third principle is that the central bank should raise the policy interest rate, over time, by more than one-for-one in response to a persistent increase in inflation and lower the policy rate more than one-for-one in response to a persistent decrease in inflation. For example, if the inflation rate rises from 2 percent to 3 percent and the increase is not caused by temporary factors, the central bank should raise the policy rate by more than one percentage point. Such an adjustment to the policy rate translates into an increase in the real policy rate–that is, the level of the policy rate adjusted for inflation–when inflation rises and a decrease in the real policy rate when inflation slows. As the real policy rate rises, it feeds through to other real interest rates that determine how expensive it is for households and businesses to borrow money to finance consumption or investment spending, adjusted for inflation. Raising real interest rates tends to reduce growth of economic activity, and firms tend to increase prices less rapidly when they see slower growth in their sales. As a result, inflation is kept in check. A symmetric logic applies to the central bank’s response to persistent decreases in inflation.

Monetarism is an economic theory that says the money supply is the most important driver of economic growth. As the money supply increases, people demand more. Factories produce more, creating new jobs. Monetarists (believers of the monetarism theory) warn that increasing the money supply only provides a temporary boost to economic growth and job creation. Over the long run, increasing the money supply increases inflation. As demand outstrips supply, prices will rise to match. Monetarism is a macroeconomic theory which states that governments can foster economic stability by targeting the growth rate of the money supply. Essentially, it is a set of views based on the belief that the total amount of money in an economy is the primary determinant of economic growth.Monetarism is an economic school of thought which states that the supply of money in an economy is the primary driver of economic growth. As the availability of money in the system increases, aggregate demand for goods and services goes up. An increase in aggregate demand encourages job creation, which reduces the rate of unemployment and stimulates economic growth. Monetary policy, an economic tool used in monetarism, is implemented to adjust interest rates that, in turn, control the money supply. When interest rates are increased, people have more of an incentive to save than to spend, thereby reducing or contracting the money supply. Contrarily, when interest rates are lowered following an expansionary monetary scheme, the cost of borrowing decreases, which means people can borrow more and spend more, thereby stimulating the economy.Monetarism is closely associated with economist Milton Friedman, who argued, based on the quantity theory of money, that the government should keep the money supply fairly steady, expanding it slightly each year to allow for the natural growth of the economy. Due to the inflationary effects that can be brought about by the excessive expansion of the money supply, Friedman, who formulated the theory of monetarism, asserted that monetary policy should be done by targeting the growth rate of the money supply to maintain economic and price stability.In his book, A Monetary History of the United States 1867–1960, Friedman proposed a fixed growth rate called the K-percent rule, suggesting that money supply should grow at a constant annual rate tied to the growth of nominal gross domestic product (GDP) and be expressed as a fixed percentage per year. This way, the money supply will be expected to grow moderately, businesses will be able to anticipate the changes to the money supply every year and plan accordingly, the economy will grow at a steady rate, and inflation will be kept at low levels.When the money supply expands, it lowers interest rates. This is due to banks having more to lend, so they are willing to charge lower rates. That means consumers borrow more to buy items like houses, automobiles, and furniture. Decreasing the money supply raises interest rates, making loans more expensive—this slows economic growth. In the United States, the Federal Reserve manages the money supply with the Federal funds rate. This is a targeted rate the Fed sets for banks to charge each other for overnight loans, and it impacts all other interest rates. The Fed uses other monetary tools, such as open market operations, buying and selling government securities to reach the target federal funds rate. The Fed reduces inflation by raising the federal funds rate or decreasing the money supply. This is known as contractionary monetary policy. However, the Fed must be careful not to tip the economy into recession. To avoid recession, and the resultant unemployment, the Fed must lower the fed funds rate and increase the money supply. This is known as expansionary monetary policy

Examples of Monetarism: Federal Reserve Chair Paul Volcker used the concept of monetarism to end stagflation (high inflation, high unemployment, and stagnant demand). By raising the federal funds rate to 20% in 1980, the money supply was reduced drastically, consumers stopped purchasing as much, and businesses stopped raising prices. That ended the out-of-control inflation, but it helped create the 1980-82 recession. Former Fed Chair Ben Bernanke agreed with Milton’s suggestion that the Fed cultivate mild inflation. He was the first Fed chair to set an official inflation target of 2% year-over-year.He felt that a higher inflation rate would make it more difficult for consumers to make long-term spending decisions and a lower inflation rate could lead to deflation.

Reg no. 2019/242791

THE MONETARIST MACROECONOMIC SYSTEM
The monetarist economy is a macro economic theory that focuses on the effects of the supply of money on the economy. It is a concept which states that government can force the economic stability by attacking the growth rate of money supply. Essentially, it is based on the belief that the total amount of money in an economy is the primary determinant of economic growth. This theory was founded by Milton Friedman, who argued that excessive expansion of the money supply is inherently inflationary, and that monetary authorities should focus solely on maintaining price level and ensure stability.
As its name suggests, monetarism is primarily concerned with monetary policy which involves controlling the money supply in the economy and is claimed to be the single most important factor influencing short and long term economic changes. In the short term, individual decisions regarding consumption and investment are infected by changes in the money supply. Increases in the money supply would encourage spending and this will boost economic activities, while decreases will reduce it. Affective monetary policy helps to stabilize prices without affecting individual output and consumption in the long term.
High inflation can be addressed by reducing the supply of money into the economy with the long term benefits of stability outweighing any short term costs.
The approach to monetarist policies is associated with a significant increase in the money supply as a means of growing inflation rates. The argument is that in the long term, stability and growth will result. Friedman’s Theory of Money states that center to monetarism is the quantity theory of money which states that money supply multiplied by the rate at which money is spent per year equals the nominal expenditures in the economy. Mathematically, MV=PY.
The monetarists believe that the direction of causation is from left to right in the equation; that is, as the money supply increases with a constant and predictable V, one can expect an increase in either P or Y(output). An increase in Y means that P will remain relatively constant, while an increase in P will occur if there is no corresponding increase in the quantity of goods and services produced. In short, a change in the money supply directly affects and determines production, employment, and price levels, and this theory is referred to as the Quantity Theory of Money.
Using an illustration to describe this theory, consider the journey a Naira note might take in a year. Imagine that the naira note starts with Precious who buys a book from John, a street vendor; john then gives it to his daughter who spends it on a shuttle ride to the department; it ends up the house of Chike, the bus driver who spends it on suya in the evening. So, this Naira note has been spent three times throughout the period.
The Naira note is M; how many times that Naira gets used in a year is called the velocity of money, V (in this case 3times). The book, ride, and suya are real goods and service represented by Y; the prices of those commodities is P. Thinking about all these variables in a whole, M= money supply, V= velocity (people who shop a lot have higher velocities than those who prefer to save the money), P = price level of all finished goods in the economy and Y = all the goods and services sold in the economy (real GDP), when multiplied by price it equals nominal GDP. This is similar to multiplying M and V- nominal GDP. So they are equal by definition. One way to think about it is that how much money we have in total times the number of times we spend in total covers the actions of buyers, while the goods we sell times the price we sell it covers the actions of sellers.
Monetarism also emphasizes the importance of the money supply and the decisions central banks make about what to do with the money supply. In the long run, the absolute amount of money in the economy does not really influence real output or real employment but in the short run, changes in the rate of inflation does influence it. In a system where the Federal reserve creates too much money for the economy, prices will be rising and inflation tends to distort the allocation of economic resources.
In conclusion, monetarists believe that changes in M directly effects and determines, employment, inflation and production. If V is constant and predictable, then an increase or decrease in M, will lead to an increase or decrease in either P or Y. an increase in P denotes that Y will remain constant while and increase in Y means that P will be relatively constant. According to monetarism, variations in the money supply will affect price levels at the long term and economic output in the short term. A change in the money supply therefore, will determine the prices, production and employment.

References
https://www.britannica.com/topic/monetarism
https://www.investopedia.com/terms/m/monetaristtheory.asp
https://en.wikipedia.org/wiki/Monetarism
https://youtu.be/CuyblgOHu-Y

NAME: MONEKE, FAVOUR CHIBUZOR
REG NO: 2019/249605
EMAIL: monekefavour@gmail.com

MONETARISM
Just how important is money? Few would deny that it plays a key role in the economy. But one school of economic thought, called monetarism, maintains that the money supply (the total amount of money in an economy) is the chief determinant of current dollar GDP in the short run and the price level over longer periods.
Monetarism is a school of thought in monetary economics that emphasizes the role of governments in controlling the amount of money in circulation. Monetarism is an economic theory that focuses on the macroeconomic effects of the supply of money and central banking. Formulated by Milton Friedman, it argues that excessive expansion of the money supply is inherently inflationary, and that monetary authorities should focus solely on maintaining price stability.

HISTORY OF MONETARISM
While economist Clark Warburton initially posited much of the monetarist theory immediately following World War II, Milton Friedman is recognized as the primary advocate of modern-day monetarism. The monetarist theory was expounded by Friedman in a book he co-wrote with Anna Schwartz, “A Monetary History of the United States, 1867–1960,” and in a 1967 speech at the American Economic Association.
Interestingly, while the monetarist theory is essentially a guide for central bank policies, Friedman was opposed to the whole idea of central banks, such as the Federal Reserve Bank in the United States.
In fact, Friedman blamed much of the Great Depression of the 1930s on the Federal Reserve, arguing that the Fed tightened the money supply at the very moment that it should have been expanding it to stimulate economic growth.
Given that central banks do exist, Friedman argued that monetary policy – the expansion or contraction of the money supply – is a much more effective tool for influencing the economy than fiscal policy – the government’s taxation and spending activities.

MONETARISM: NIGERIA A CASE STUDY
The Impact Of Monetary Policy On The Economic Growth Of Nigeria
In Nigeria, monetary policy has been used since the Central bank of Nigeria was saddled the responsibility of formulating and implementing monetary policy by Central bank Act of 1958. This role has facilitated the emergence of active money market where treasury bills, a financial instrument used for open market operations and raising debt for government has grown in volume and value becoming a prominent earning asset for investors and source of balancing liquidity in the market. There have been various regimes of monetary policy in Nigeria sometimes, monetary policy is tight and at other times it is loose mostly used to stabilize prices. The economy has also witnessed times of expansion and contraction but evidently, the reported growth has not been a sustainable one as there is evidence of growing poverty among the populace. The question is, could the period of growth be attributed to appropriate monetary policy? And could the periods of economic down turn be blamed on factors other than monetary policy ineffectiveness? What measures are to be considered if monetary policy would be effective in bringing about sustainable economic growth and development? These are the Questions this study would attempt to answer. The objective of this study therefore, is to assess the impact of monetary policy in Nigeria, specifically, if it has facilitated growth or not and examine the effect of other co-operant factors in bringing about the desired sustainable economic development in Nigeria.
The primary goal of monetary policy in Nigeria has been the maintenance of domestic price and exchange rate stability since it is critical for the attainment of sustainable economic growth and external sector viability (Sanusi, 2002. P. 1) (Adefeso and Mobolaji, 2010) employed Jahansen maximum likelihood co-integration procedure to show that there is a long run relationship between economic growth, degree of openness, government expenditure and M2. (Ajisafe and Folunso, 2002) observe that that monetary policy exerts significant impact on economic activity in Nigeria. (Kogar 1995) examinee the relationship between financial innovations and monetary control and concludes that in a changing financial structure, Central Banks cannot realize efficient monetary policy without setting new procedures and instruments in the long-run, because profit seeking financial institutions change or create new instruments in order to evade regulations or respond to the economic conditions in the economy. Examining the evolution of monetary policy in Nigeria in the past four decades, (Nnanna, 2001, P. 11) observe that though, the Monetary management in Nigeria has been relatively more successful during the period of financial sector reform which is characterized by the use of indirect rather than direct monetary policy tools yet, the effectiveness of monetary policy has been undermined by the effects of fiscal dominance, political interference and the legal environment in which the Central Bank operates. (Busari et-al 2002) state that monetary policy stabilizes the economy better under a flexible exchange rate system than a fixed exchange rate system and it stimulates growth better under a flexible rate regime but is accompanied by severe depreciation, which could destabilize the economy meaning that monetary policy would better stabilize the economy if it is used to target inflation directly than be used to directly stimulate growth.

Research Methodology: This research is designed to critically appraise the monetary policy in Nigeria in the light of macroeconomic performance of the country. The Ordinary Least Square (OLS) i.e. regression a nalysis method is used to analyse the data that are collected from Central Bank of Nigeria and National Bureau of Statistics publications for various years covering 1981 to 2008. In demonstrating the application of the Ordinary Least Square method, three multiple regression models is used with the liquidity ratio, money supply, cash ratio as the independent variables in all the models while gross domestic product, inflation rate and balance of payment would be the dependent variables in model one, model two and model three respectively.

PROBLEMS AND CONTROVERSIES OF MONETARY POLICY
Lags: Perhaps the greatest obstacle facing the Fed, or any other central bank, is the problem of lags. It is easy enough to show a recessionary gap on a graph and then to show how monetary policy can shift aggregate demand and close the gap. In the real world, however, it may take several months before anyone even realizes that a particular macroeconomic problem is occurring. When monetary authorities become aware of a problem, they can act quickly to inject reserves into the system or to withdraw reserves from it. Once that is done, however, it may be a year or more before the action affects aggregate demand. The problem of lags suggests that monetary policy should respond not to statistical reports of economic conditions in the recent past but to conditions expected to exist in the future. In justifying the imposition of a contractionary monetary policy early in 1994, when the economy still had a recessionary gap, Greenspan indicated that the Fed expected a one-year impact lag. The policy initiated in 1994 was a response not to the economic conditions thought to exist at the time but to conditions expected to exist in 1995.

Choosing Targets: In attempting to manage the economy, on what macroeconomic variables should the Fed base its policies? It must have some target, or set of targets, that it wants to achieve. The failure of the economy to achieve one of the Fed’s targets would then trigger a shift in monetary policy. The choice of a target, or set of targets, is a crucial one for monetary policy. Possible targets include interest rates, money growth rates, and the price level or expected changes in the price level.
Interest Rates: Interest rates, particularly the federal funds rate, played a key role in recent Fed policy. The FOMC does not decide to increase or decrease the money supply. Rather, it engages in operations to nudge the federal funds rate up or down.Up until August 1997, it had instructed the trading desk at the New York Federal Reserve Bank to conduct open-market operations in a way that would either maintain, increase, or ease the current “degree of pressure” on the reserve positions of banks. That degree of pressure was reflected by the federal funds rate; if existing reserves were less than the amount banks wanted to hold, then the bidding for the available supply would send the federal funds rate up. If reserves were plentiful, then the federal funds rate would tend to decline. When the Fed increased the degree of pressure on reserves, it sold bonds, thus reducing the supply of reserves and increasing the federal funds rate. The Fed decreased the degree of pressure on reserves by buying bonds, thus injecting new reserves into the system and reducing the federal funds rate.

Money Growth Rates: Until 2000, the Fed was required to announce to Congress at the beginning of each year its target for money growth that year and each report dutifully did so. At the same time, the Fed report would mention that its money growth targets were benchmarks based on historical relationships rather than guides for policy. As soon as the legal requirement to report targets for money growth ended, the Fed stopped doing so. Since in recent years the Fed has placed more importance on the federal funds rate, it must adjust the money supply in order to move the federal funds rate to the level it desires. As a result, the money growth targets tended to fall by the wayside, even over the last decade in which they were being reported. Instead, as data on economic conditions unfolded, the Fed made, and continues to make, adjustments in order to affect the federal funds interest rate.

Political Pressures: The institutional relationship between the leaders of the Fed and the executive and legislative branches of the federal government is structured to provide for the Fed’s independence. Members of the Board of Governors are appointed by the president, with confirmation by the Senate, but the 14-year terms of office provide a considerable degree of insulation from political pressure. A president exercises greater influence in the choice of the chairman of the Board of Governors; that appointment carries a four-year term. Neither the president nor Congress has any direct say over the selection of the presidents of Federal Reserve district banks. They are chosen by their individual boards of directors with the approval of the Board of Governors. The degree of independence that central banks around the world have varies. A central bank is considered to be more independent if it is insulated from the government by such factors as longer-term appointments of its governors and fewer requirements to finance government budget deficits. Studies in the 1980s and early 1990s showed that, in general, greater central bank independence was associated with lower average inflation and that there was no systematic relationship between central bank independence and other indicators of economic performance, such as real GDP growth or unemployment.

RECOMMENDATIONS
Based on the findings made in the course of this study, particularly the results of the regression models, it is clear that the development of the Nigerian economy is highly dependent on the provision of the right environment for investment, which will in no doubt encourage economic growth and development. The following recommendations are hereby made:
(1) Monetary policies should be used to create a favorable investment climate by facilitating the emergency of market-based interest rate and exchange rate regimes that attract both domestic and foreign investments, create jobs, promote non-oil export and revive industries that are currently operation far below installed capacity. In order to strengthen the financial sector, the Central Bank has to encourage the introduction of more financial instruments that are flexible enough to meet the risk preferences and sophistication of operators in the financial sector.
(2) The government should also endeavor to make the financial sector less volatile and more viable as it is in developed countries. This will allow for smooth execution of the Central Bank monetary policies. Law relating to the operation of the financial institutions could be made a bit less stringent and more favorable for the operators to have room to operate more freely.
(3) The Central Bank should find a way of reducing the level of deficit financing, improve funding of the informal sector and the SMEs and promote their integration into the formal sector while at the same time working with government to improve the tax regime to make the tax capacity to approach the tax potential so as to reduce tax evasion to barest minimum and ensure that there is proper balancing between capital and recurrent expenditures of government.

REFERENCES
Adefeso, H. and Mobolaji, H. (2010) ‘The fiscal- monetary policy and economic growth in Nigeria: further empirical evidence’, Pakistan Journal of Social Sciences, Vol. 7(2) Pp 142
Batini, N. (2004) ‘Achieving and maintaining price stability in Nigeria’. IMF Working Paper WP/04/97, June.
Borio, C. (1995) ‘The structure of credit to the non-government sector and the transmission mechanism of monetary policy: A Cross-Country Comparison,’ Bank for International Settlement Working Paper, Basle, April.
Busari,D., Omoke, P and Adesoye, B. (2002) ‘Monetary policy and macroeconomic stabilization under Alternative exchange rate regime: evidence from Nigeria’.
Diamond, R. (2003) Irving Fisher on the international transmission of boom and depression through money standard: Journal of Money, Credit and Banking, Vol. 35 Pp 49 online edition
Folawewo, A and Osinubi, T. (2006) ‘Monetary policy and macroeconomic instability in Nigeria: A Rational Expectation Approach’. Journal of Social Science, vol.12(2): pp.93-100.
Friedman, Milton. (1968) ‘ The role of monetary policy, American Economic Review, Vol. 58, No 1.Pp 1-17
Friedman, M and Schwartz, A. (1963) ‘Money and business cycles’ Review of Economics and Statistics, February, pp. 32-64
Gertler, M and Gilchrist, S. (1991) ‘Monetary policy, business cycles and the behaviour of small manufacturing firms’ WP 3892, National Bureau of Economic Research, Cambridge, November.
Keynes, J. (1930) ‘Treatise on money’ London, Macmillian. P. 90 Kogar, C. (1995) ‘Financial innovations and monetary control’ The Central Bank of The Republic of Turkey
Modigliani, F. (1963) ‘The monetary mechanism and its interaction with real phenomena’, Review of Economics and Statistics, Supplement, February, pp. 79-107
Nnanna, O. (2001) ‘The monetary policy framework in Africa: The Nigerian experience. Extracted from www2.resbank.co.za/internet/publication…./Nigeria.pdf. Pp 11
Oliner,S and Rudebusch, G. (1995) ‘Is there a bank lending channel for monetary policy?’ Economic Review, Federal Reserve Bank of San Francisco, No. 2 pp.3-20.
Sanusi, J. (2002) ‘Central Bank and the macroeconomic environment in Nigeria’. Being a Lecture delivered to participants of the senior executive course No. 24 of the national Institute for policy and strategic studies (NIPSS), Kuru on 19 th august.
Tobin, J. (1978) ‘Aproposal for international monetary reform’ Easter Economic Journal, Easter Economic Association, Vol. 4(3) Page 153-159.

Nwankwo Faith Obiageli….2019/244721

How important is money? Few would deny that it plays a key role in the economy. But one school of economic thought, called monetarism, maintains that the money supply (the total amount of money in an economy) is the chief determinant of current dollar GDP in the short run and the price level over longer periods. Monetary policy, one of the tools governments have to affect the overall performance of the economy, uses instruments such as interest rates to adjust the amount of money in the economy. Monetarists believe that the objectives of monetary policy are best met by targeting the growth rate of the money supply. Monetarism gained prominence in the 1970s—bringing down inflation in the United States and United Kingdom—and greatly influenced the U.S. central bank’s decision to stimulate the economy during the global recession of 2007–09.
Monetarism is a macroeconomic theory which states that governments can foster economic stability by targeting the growth rate of the money supply. Essentially, it is a set of views based on the belief that the total amount of money in an economy is the primary determinant of economic growth.Monetarism is an economic school of thought which states that the supply of money in an economy is the primary driver of economic growth. As the availability of money in the system increases, aggregate demand for goods and services goes up. An increase in aggregate demand encourages job creation, which reduces the rate of unemployment and stimulates economic growth.Monetarism is closely associated with economist Milton Friedman, who is the founding father,who argued, based on the quantity theory of money, that the government should keep the money supply fairly steady, expanding it slightly each year to allow for the natural growth of the economy. Due to the inflationary effects that can be brought about by the excessive expansion of the money supply, Friedman, who formulated the theory of monetarism, asserted that monetary policy should be done by targeting the growth rate of the money supply to maintain economic and price stability.Monetary policy, an economic tool used in monetarism, is implemented to adjust interest rates that, in turn, control the money supply. When interest rates are increased, people have more of an incentive to save than to spend, thereby reducing or contracting the money supply. Contrarily, when interest rates are lowered following an expansionary monetary scheme, the cost of borrowing decreases, which means people can borrow more and spend more, thereby stimulating the economy.Central to monetarism is the “quantity theory of money,” which monetarists adopted from earlier economic theories and integrated into the general Keynesian framework of macroeconomics. The quantity theory of money can be summarized in the equation of exchange, formulated by John Stuart Mill, which states that the money supply, multiplied by the rate at which money is spent per year, equals the nominal expenditures in the economy. The formula is given as:
MV=PQ
where:
M=money supply
V=velocity (rate at which money changes hands)
P=average price of a good or service
Q=quantity of goods and services sold
Which is the building block for monetarist theory. A key point to note is that monetarists believe that changes to M (money supply) are the driver of the equation. In short, a change in M directly affects and determines employment, inflation (P), and production (Q). In the original version of the quantity theory of money, V is held to be constant, but this assumption was dropped by John Maynard Keynes and is not assumed by the monetarists, who instead believe that V is easily predictable. The difference between these
theories is that monetarist economics involves the control of money in the economy, while Keynesian economics involves government expenditures. Monetarists believe in controlling the supply of money that flows into the economy while allowing the rest of the market to fix itself.
*Characteristics of Monetarism
Monetarism is a mixture of theoretical ideas, philosophical beliefs, and policy prescriptions. Here we list the most important ideas and policy implications and explain them below.
– The theoretical foundation is the Quantity Theory of Money.
– The economy is inherently stable. Markets work well when left to themselves. Government intervention can often times destabilize things more than they help. Laissez faire is often the best advice.
– The Fed should be bound to fixed rules in conducting monetary policy. They should not have discretion in conducting policy because they could make the economy worse off.
– Fiscal Policy is often bad policy. A small role for government is good.
Monetarists (believers of the monetarism theory) warn that increasing the money supply only provides a temporary boost to economic growth and job creation. Over the long run, increasing the money supply increases inflation. As demand outstrips supply, prices will rise to match. Monetarists believe monetary policy is more effective than fiscal policy (government spending and tax policy). Stimulus spending adds to the money supply, but it creates a deficit adding to a country’s sovereign debt. That could increase interest rates. Monetarists say that central banks are more powerful than the government because they control the money supply.They also tend to watch real interest rates rather than nominal rates. Most published rates are nominal rates, while real rates remove the effects of inflation. Real rates give a truer picture of the cost of money.
Examples of monetarism
Federal Reserve Chair Paul Volcker used the concept of monetarism to end stagflation (high inflation, high unemployment, and stagnant demand). By raising the federal funds rate to 20% in 1980, the money supply was reduced drastically, consumers stopped purchasing as much, and businesses stopped raising prices. That ended the out-of-control inflation, but it helped create the 1980-82 recession.

Former Fed Chair Ben Bernanke agreed with Milton’s suggestion that the Fed cultivate mild inflation. He was the first Fed chair to set an official inflation target of 2% year-over-year. He felt that a higher inflation rate would make it more difficult for consumers to make long-term spending decisions and a lower inflation rate could lead to deflation.
Monetarism is commonly associated with neoliberalism. Monetarism today is mainly associated with the work of Milton Friedman, who was among the generation of economists to accept Keynesian economics and then criticise Keynes’s theory of fighting economic downturns using fiscal policy (government spending).
​

MONETARIST MICROECONOMIC SYSTEM
The monetarist theory is an economic concept that contends that changes in money supply are the most significant determinants of the rate of economic growth and the behaviour of the business cycle. When monetarist theory works in practice, central banks, which control the levers of monetary policy, can exert much power over economic growth rates. Monetarism, school of economic thought that maintains that the money supply (the total amount of money in an economy, in the form of coin, currency, and bank deposits) is the chief determinant on the demand side of short-run economic activity.
American economist Milton Friedman is generally regarded as monetarism’s leading exponent. Friedman and other monetarists advocate a macroeconomic theory and policy that diverge significantly from those of the formerly dominant Keynesian school. The monetarist approach became influential during the 1970s and early ’80s.
Monetarists believe in controlling the supply of money that flows into the economy while allowing the rest of the market to fix itself. Increasing money supply, according to the theory, inevitably leads to higher prices and inflation, while decreasing the money supply leads to deflation and risks, causing a recession. Changes in the money supply also affect employment and production levels, but the monetarist theory asserts that those effects are only temporary, while the effect on inflation is more long-lasting and significant. Monetarist theory is governed by a simple formula: MV = PQ, where M is the money supply, V is the velocity (number of times per year the average dollar is spent), P is the price of goods and services and Q is the quantity of goods and services. Assuming constant V, when M is increased, either P, Q, or both P and Q rise.

General price levels tend to rise more than the production of goods an d services when the economy is closer to full employment. When there is slack in the economy, Q will increase at a faster rate than P under monetarist theory. However, the quantity theory is the basis for several key tenets and prescriptions of monetarism:

• Long-run monetary neutrality: An increase in the money stock would be followed by an increase in the general price level in the long run, with no effects on real factors such as consumption or output.

• Short-run monetary no neutrality: An increase in the stock of money has temporary effects on real output (GDP) and employment in the short run because wages and prices take time to adjust (they are sticky, in economic parlance).

• Constant money growth rule: Friedman, who died in 2006, proposed a fixed monetary rule, which states that the Fed should be required to target the growth rate of money to equal the growth rate of real GDP, leaving the price level unchanged. If the economy is expected to grow at 2 percent in a given year, the Fed should allow the money supply to increase by 2 percent.

• Interest rate flexibility: The money growth rule was intended to allow interest rates, which affect the cost of credit, to be flexible to enable borrowers and lenders to take account of expected inflation as well as the variations in real interest rates.

Many monetarists also believe that markets are inherently stable in the absence of major unexpected fluctuations in the money supply. They also assert that government intervention can often destabilize the economy more than help it. Monetarists also believe that there is no long-run trade-off between inflation and unemployment because the economy settles at long-run equilibrium at a full employment level of output

CONTROLLING MONEY SUPPLY
There are three main levers for controlling money supply :

1.The reserve ratio: The percentage of reserves a bank is required to hold against deposits.

2. The discount rate: The interest rate the Fed charges commercial banks that need to borrow additional reserves.

3.Open market operations: Open market operations consist of buying and selling government securities. Buying securities from large banks increases the supply of money, while selling securities contracts decreases the money supply in the economy.

MONETARIST ECONOMICS VS KEYNESIAN ECONOMICS THEORY
Monetarist economics is Milton Friedman’s direct criticism of Keynesian economics theory, formulated by John Maynard Keynes. Simply put, the difference between these theories is that monetarist economics involves the control of money in the economy, while Keynesian economics involves government expenditures.
Monetarists believe in controlling the supply of money that flows into the economy while allowing the rest of the market to fix itself. In contrast, Keynesian economists believe that a troubled economy continues in a downward spiral unless an intervention drives consumers to buy more goods and services. Both of these macroeconomic theories directly impact the way lawmakers create fiscal and monetary policies. If both types of economists were equated to motorists, monetarists would be most concerned with adding gasoline to their tanks, while Keynesians would be most concerned with keeping their motors running.

HOW DOES MONEY SUPPLY WORK?

When the money supply expands, it lowers interest rates. This is due to banks having more to lend, so they are willing to charge lower rates. That means consumers borrow more to buy items like houses, automobiles, and furniture. Decreasing the money supply raises interest rates, making loans more expensive—this slows economic growth. In the United States, the Federal Reserve manages the money supply with the Federal funds rate. This is a targeted rate the Fed sets for banks to charge each other for overnight loans, and it impacts all other interest rates.
The Fed uses other monetary tools, such as open market operations, buying and selling government securities to reach the target federal funds rate. The Fed reduces inflation by raising the federal funds rate or decreasing the money supply. This is known as contractionary monetary policy. However, the Fed must be careful not to tip the economy into recession. To avoid recession, and the resultant unemployment, the Fed must lower the fed funds rate and increase the money supply. This is known as expansionary monetary policy.

Example of monetarism(UK inflation 1970s – 1980s)

Margaret Thatcher was another dignitary who had embraced monetarism to battle inflation. The UK was experiencing prolonged inflation before the 1980s, hitting 25% in the mid-1970s. As a result, there was heavy unemployment, adding to the economic crisis.
After becoming the prime minister, Thatcher made decisions in line with monetarism, free-market concept, privatization and minimal government intervention. The base rate was increased to 17% to arrest inflation and it did eventually. Thatcher successfully brought down inflation by the early 1980s. However, while some sectors boomed terrifically, unemployment went up and manufacturing declined, decreasing the GDP.

Monetarist Theory Limitations

1.Maintaining steady and moderate growth of the money supply is impossible because money circulates in many forms.

2. Economic events are unpredictable and having a set growth rate could pressurize an economy when there is a massive gap between actual and estimated development.

3.In economics, the evidence supporting monetarist’s beliefs is scarce.

4.The monetary policy excludes non-monetary factors such political interference, unequal wealth distribution, corruption, etc.

Monetarism is a macroeconomic theory which states that governments can foster economic stability by targeting the growth rate of the money supply. Essentially, it is a set of views based on the belief that the total amount of money in an economy is the primary determinant of economic growth.
Monetarism is an economic school of thought which states that the supply of money in an economy is the primary driver of economic growth. As the availability of money in the system increases, aggregate demand for goods and services goes up. An increase in aggregate demand encourages job creation, which reduces the rate of unemployment and stimulates economic growth.
Monetary policy, an economic tool used in monetarism, is implemented to adjust interest rates that, in turn, control the money supply. When interest rates are increased, people have more of an incentive to save than to spend, thereby reducing or contracting the money supply. Contrarily, when interest rates are lowered following an expansionary monetary scheme, the cost of borrowing decreases, which means people can borrow more and spend more, thereby stimulating the economy.
Milton Friedman and Monetarism
Monetarism is closely associated with economist Milton Friedman, who argued, based on the quantity theory of money, that the government should keep the money supply fairly steady, expanding it slightly each year to allow for the natural growth of the economy. Due to the inflationary effects that can be brought about by the excessive expansion of the money supply, Friedman, who formulated the theory of monetarism, asserted that monetary policy should be done by targeting the growth rate of the money supply to maintain economic and price stability.
In his book, A Monetary History of the United States 1867–1960, Friedman proposed a fixed growth rate called the K-percent rule, suggesting that money supply should grow at a constant annual rate tied to the growth of nominal gross domestic product (GDP) and be expressed as a fixed percentage per year. This way, the money supply will be expected to grow moderately, businesses will be able to anticipate the changes to the money supply every year and plan accordingly, the economy will grow at a steady rate, and inflation will be kept at low levels.

The Quantity Theory of Money
Central to monetarism is the “quantity theory of money,” which monetarists adopted from earlier economic theories and integrated into the general Keynesian framework of macroeconomics. The quantity theory of money can be summarized in the equation of exchange, formulated by John Stuart Mill, which states that the money supply, multiplied by the rate at which money is spent per year, equals the nominal expenditures in the economy. The formula is given as:
MV=PQ
Where;
M= Money supply
V= Velocity (rate at which money changes hand)
P= Average price of a good or service
Q= Quantity of goods and services sold.
A key point to note is that monetarists believe that changes to M (money supply) are the driver of the equation. In short, a change in M directly affects and determines employment, inflation (P), and production (Q). In the original version of the quantity theory of money, V is held to be constant, but this assumption was dropped by John Maynard Keynes and is not assumed by the monetarists, who instead believe that V is easily predictable.
Economic growth is a function of economic activity (Q) and inflation (P). If V is constant (or at least predictable), then an increase (or decrease) in M will lead to an increase (or decrease) in either P or Q.

An increase in P denotes that Q will remain constant, while an increase in Q means that P will be relatively constant. According to monetarism, variations in the money supply will affect price levels over the long term and economic output in the short term. A change in the money supply, therefore, will directly determine prices, production, and employment.
History of Monetarism
Monetarism gained prominence in the 1970s, a decade characterized by high and rising inflation and slow economic growth. The policies of monetarism were responsible for bringing down inflation in the United States and the United Kingdom. After U.S. inflation peaked at 20% in 1979, the Fed switched its operating strategy to reflect monetarist theory. During this time period, economists, governments, and investors eagerly jumped at every new money supply statistic.
In the years that followed, however, monetarism fell out of favor with many economists, as the link between different measures of money supply and inflation proved to be less clear than most monetarist theories had suggested. In addition, monetarism’s ability to explain the U.S. economy waned in the following decades. Many central banks today have stopped setting monetary targets and instead have adopted strict inflation targets.

Although most modern economists reject the emphasis on money growth that monetarists purported in the past, some core tenets of the theory have become a mainstay in nonmonetarist analysis. One of the most important of these ideas is that inflation cannot continue indefinitely without increases in the money supply. In addition, it is the responsibility (although not the primary goal) of the central bank to control inflation.

That being said, monetarist interpretations of past economic events are still relevant today. Ben Bernanke, former Fed Chairman, cited the work of Friedman in his decision to lower interest rates and increase the U.S. money supply in order to boost the economy during the global recession that began in 2007 in the United States.

REFERENCES
1.International Monetary Fund. “What Is Monetarism?” https://www.imf.org/external/pubs/ft/fandd/2014/03/basics.htm#:~:text=Monetarism%20gained%20prominence%20in%20the,Prize%E2%80%93winning%20economist%20Milton%20Friedman.
2.Federal Reserve Bank of St. Louis. “Effective Federal Funds Rate.”
https://fred.stlouisfed.org/series/FEDFUNDS.
3.International Monetary Fund. “What Is Monetarism?”
https://www.imf.org/external/pubs/ft/fandd/2014/03/basics.htm

Name: Ubazoro Chukwuemeka George
Reg no: 2019/251195
What Is Monetarism?
Monetarism is a macroeconomic theory which states that governments can foster economic stability by targeting the growth rate of the money supply. Essentially, it is a set of views based on the belief that the total amount of money in an economy is the primary determinant of economic growth.
Core Beliefs on Monetarism
Monetarism is a macroeconomic theory stating that governments can foster economic stability by targeting the growth rate of the money supply.
Central to monetarism is the quantity theory of money, which states that the money supply (M) multiplied by the rate at which money is spent per year (V) equals the nominal expenditures (P * Q) in the economy.
Monetarism is closely associated with economist Milton Friedman, who argued that the government should keep the money supply fairly steady, expanding it slightly each year mainly to allow for the natural growth of the economy.Monetarism is a branch of Keynesian economics that emphasizes the use of monetary policy over fiscal policy to manage aggregate demand, contrary to most Keynesians.Although most modern economists reject the emphasis on money growth that monetarists purported in the past, some core tenets of the theory have become a mainstay in nonmonetarist analysis.
Understanding Monetarism
Monetarism is an economic school of thought which states that the supply of money in an economy is the primary driver of economic growth. As the availability of money in the system increases, aggregate demand for goods and services goes up. An increase in aggregate demand encourages job creation, which reduces the rate of unemployment and stimulates economic growth.Monetary policy, an economic tool used in monetarism, is implemented to adjust interest rates that, in turn, control the money supply. When interest rates are increased, people have more of an incentive to save than to spend, thereby reducing or contracting the money supply. Contrarily, when interest rates are lowered following an expansionary monetary scheme, the cost of borrowing decreases, which means people can borrow more and spend more, thereby stimulating the economy.
Origin of Monetarism Theory:
Monetarism is closely associated with economist Milton Friedman, who argued, based on the quantity theory of money, that the government should keep the money supply fairly steady, expanding it slightly each year to allow for the natural growth of the economy. Due to the inflationary effects that can be brought about by the excessive expansion of the money supply, Friedman, who formulated the theory of monetarism, asserted that monetary policy should be done by targeting the growth rate of the money supply to maintain economic and price stability.
In his book, A Monetary History of the United States 1867–1960, Friedman proposed a fixed growth rate called the K-percent rule, suggesting that money supply should grow at a constant annual rate tied to the growth of nominal gross domestic product (GDP) and be expressed as a fixed percentage per year. This way, the money supply will be expected to grow moderately, businesses will be able to anticipate the changes to the money supply every year and plan accordingly, the economy will grow at a steady rate, and inflation will be kept at low levels.
The Quantity Theory of Money
Central to monetarism is the “quantity theory of money,” which monetarists adopted from earlier economic theories and integrated into the general Keynesian framework of macroeconomics. The quantity theory of money can be summarized in the equation of exchange, formulated by John Stuart Mill, which states that the money supply, multiplied by the rate at which money is spent per year, equals the nominal expenditures in the economy.
The formula is given as:
MV=PQ
where:
M=money supply
V=velocity (rate at which money changes hands)
P=average price of a good or service
Q=quantity of goods and services sold
​A key point to note is that monetarists believe that changes to M (money supply) are the driver of the equation. In short, a change in M directly affects and determines employment, inflation (P), and production (Q). In the original version of the quantity theory of money, V is held to be constant, but this assumption was dropped by John Maynard Keynes and is not assumed by the monetarists, who instead believe that V is easily predictable.Economic growth is a function of economic activity (Q) and inflation (P). If V is constant (or at least predictable), then an increase (or decrease) in M will lead to an increase (or decrease) in either P or Q.

An increase in P denotes that Q will remain constant, while an increase in Q means that P will be relatively constant. According to monetarism, variations in the money supply will affect price levels over the long term and economic output in the short term. A change in the money supply, therefore, will directly determine prices, production, and employment.
Monetarism System vs. Keynesian Economics System
The view that velocity is constant is a source of contention among Keynesians, who believe that velocity should not be constant since the economy is volatile and subject to periodic instability. Instead, Keynes’ liquidity preference theory emphasizes how changes in money demand (and thus velocity) influence the price level and aggregate demand.

Monetarism builds on the Keynesian theory by assuming the same macroeconomic framework and integrating the equation of exchange (with V swinging cyclically, as Keynes argued), but instead focuses on the role played by money supply. Because they believe that V can be relatively easily predicted, monetarists argue that the equation of exchange could be resuscitated as an approach to stabilization policy, and they favor the use of monetary policy to do so.Proponents of monetarism generally believe that controlling an economy through fiscal policy is a poor decision because it necessarily introduces microeconomic distortions that reduce economic efficiency. They prefer monetary policy as a tool to manage aggregate demand in a way that will be more neutral from a microeconomics standpoint and that avoids the deadweight losses and social costs that fiscal policy creates in markets.

Name:Udekwu Sharon Chikaodili
Reg no: 2019/249132
What Is Monetarism?
Monetarism is a macroeconomic theory which states that governments can foster economic stability by targeting the growth rate of the money supply. Essentially, it is a set of views based on the belief that the total amount of money in an economy is the primary determinant of economic growth.
Core Beliefs on Monetarism
Monetarism is a macroeconomic theory stating that governments can foster economic stability by targeting the growth rate of the money supply.
Central to monetarism is the quantity theory of money, which states that the money supply (M) multiplied by the rate at which money is spent per year (V) equals the nominal expenditures (P * Q) in the economy.
Monetarism is closely associated with economist Milton Friedman, who argued that the government should keep the money supply fairly steady, expanding it slightly each year mainly to allow for the natural growth of the economy.Monetarism is a branch of Keynesian economics that emphasizes the use of monetary policy over fiscal policy to manage aggregate demand, contrary to most Keynesians.Although most modern economists reject the emphasis on money growth that monetarists purported in the past, some core tenets of the theory have become a mainstay in nonmonetarist analysis.
Understanding Monetarism
Monetarism is an economic school of thought which states that the supply of money in an economy is the primary driver of economic growth. As the availability of money in the system increases, aggregate demand for goods and services goes up. An increase in aggregate demand encourages job creation, which reduces the rate of unemployment and stimulates economic growth.Monetary policy, an economic tool used in monetarism, is implemented to adjust interest rates that, in turn, control the money supply. When interest rates are increased, people have more of an incentive to save than to spend, thereby reducing or contracting the money supply. Contrarily, when interest rates are lowered following an expansionary monetary scheme, the cost of borrowing decreases, which means people can borrow more and spend more, thereby stimulating the economy.
Origin of Monetarism Theory:
Monetarism is closely associated with economist Milton Friedman, who argued, based on the quantity theory of money, that the government should keep the money supply fairly steady, expanding it slightly each year to allow for the natural growth of the economy. Due to the inflationary effects that can be brought about by the excessive expansion of the money supply, Friedman, who formulated the theory of monetarism, asserted that monetary policy should be done by targeting the growth rate of the money supply to maintain economic and price stability.
In his book, A Monetary History of the United States 1867–1960, Friedman proposed a fixed growth rate called the K-percent rule, suggesting that money supply should grow at a constant annual rate tied to the growth of nominal gross domestic product (GDP) and be expressed as a fixed percentage per year. This way, the money supply will be expected to grow moderately, businesses will be able to anticipate the changes to the money supply every year and plan accordingly, the economy will grow at a steady rate, and inflation will be kept at low levels.
The Quantity Theory of Money
Central to monetarism is the “quantity theory of money,” which monetarists adopted from earlier economic theories and integrated into the general Keynesian framework of macroeconomics. The quantity theory of money can be summarized in the equation of exchange, formulated by John Stuart Mill, which states that the money supply, multiplied by the rate at which money is spent per year, equals the nominal expenditures in the economy.
The formula is given as:
MV=PQ
where:
M=money supply
V=velocity (rate at which money changes hands)
P=average price of a good or service
Q=quantity of goods and services sold
​A key point to note is that monetarists believe that changes to M (money supply) are the driver of the equation. In short, a change in M directly affects and determines employment, inflation (P), and production (Q). In the original version of the quantity theory of money, V is held to be constant, but this assumption was dropped by John Maynard Keynes and is not assumed by the monetarists, who instead believe that V is easily predictable.Economic growth is a function of economic activity (Q) and inflation (P). If V is constant (or at least predictable), then an increase (or decrease) in M will lead to an increase (or decrease) in either P or Q.

An increase in P denotes that Q will remain constant, while an increase in Q means that P will be relatively constant. According to monetarism, variations in the money supply will affect price levels over the long term and economic output in the short term. A change in the money supply, therefore, will directly determine prices, production, and employment.
Monetarism System vs. Keynesian Economics System
The view that velocity is constant is a source of contention among Keynesians, who believe that velocity should not be constant since the economy is volatile and subject to periodic instability. Instead, Keynes’ liquidity preference theory emphasizes how changes in money demand (and thus velocity) influence the price level and aggregate demand.

Monetarism builds on the Keynesian theory by assuming the same macroeconomic framework and integrating the equation of exchange (with V swinging cyclically, as Keynes argued), but instead focuses on the role played by money supply. Because they believe that V can be relatively easily predicted, monetarists argue that the equation of exchange could be resuscitated as an approach to stabilization policy, and they favor the use of monetary policy to do so.Proponents of monetarism generally believe that controlling an economy through fiscal policy is a poor decision because it necessarily introduces microeconomic distortions that reduce economic efficiency. They prefer monetary policy as a tool to manage aggregate demand in a way that will be more neutral from a microeconomics standpoint and that avoids the deadweight losses and social costs that fiscal policy creates in markets.

What is Monetarism：
Monetarism is an economic theory that says the money supply is the most important driver of economic growth. As the money supply increases, people demand more. Factories produce more, creating new jobs.
Monetarists (believers of the monetarism theory) warn that increasing the money supply only provides a temporary boost to economic growth and job creation. Over the long run, increasing the money supply increases inflation. As demand outstrips supply, prices will rise to match.
Background on Monetarism
Monetarists believe monetary policy is more effective than fiscal policy (government spending and tax policy). Stimulus spending adds to the money supply, but it creates a deficit adding to a country’s sovereign debt. That could increase interest rates.Monetarists say that central banks are more powerful than the government because they control the money supply.1 They also tend to watch real interest rates rather than nominal rates. Most published rates are nominal rates, while real rates remove the effects of inflation. Real rates give a truer picture of the cost of money.
Money Supply in the Monetarist System
Monetarism has recently gone out of favor.Money supply has become a less useful measure of liquidity than in the past.However, the money supply does not measure other assets, such as stocks, commodities and home equity. People are more likely to save money by investing in the stock market because they receive a better return. That means the money supply does not measure these assets. If the stock market rises, people feel wealthy and are inclined to spend more. An increase in spending increases demands, which boosts the economy.Stocks, commodities and home equity created economic booms that the Fed (the Federal Reserve) ignored. The Great Recession was fueled in part by the creation of a housing market bubble (home values rising, loans being approved for people who couldn’t afford them, and money being made by investors on the loans), which burst and took much of the economy with it.
How the Monetarist System Works:
When the money supply expands, it lowers interest rates. This is due to banks having more to lend, so they are willing to charge lower rates. That means consumers borrow more to buy items like houses, automobiles, and furniture. Decreasing the money supply raises interest rates, making loans more expensive—this slows economic growth.In the United States, the Federal Reserve manages the money supply with the Federal funds rate. This is a targeted rate the Fed sets for banks to charge each other for overnight loans, and it impacts all other interest rates. The Fed uses other monetary tools, such as open market operations, buying and selling government securities to reach the target federal funds rate.

Name: Omeje Jacinta ukamaka
Reg no: 2017/250122
Department: Economics
Discuss the monetarist macroeconomic system
Monetarism is a school of thought in economics which states that money supply (that is, the total amount of money in circulation in an economy) is the major determinant of economic growth. The father of monetarism is American economist Milton Friedman and his theory gained popularity in the 1970s and early ’80s.
According to Milton Friedman, the government can promote economic stability by putting the rate of growth of the money supply under control, and this could be achieved by pursuing the simple rule that states that money supply be increased at a fixed annual rate tied to the possible growth of gross domestic product (GDP) and expressed as a percentage.
Following the monetarist theory is the equation of exchange, which is given as MV=PQ.
Where M = the supply of money
V = the velocity of turnover of money (that is, the number of times per year on the average that money is spent on the purchase of goods and services)
P = the average price level at which each of the goods and services is sold
Q = the quantity of goods and services produced.
This equation explains the fact that money supply directly affects and determines production, employment, and price levels. Economic growth is a function of economic activity (Q) and price levels (P). If V is fixed, then an increase (or decrease) in M will lead to an increase (or decrease) in either P or Q. An increase in P means that Q will remain fixed, while an increase in Q means that P will be moderately fixed. According to monetarism, changes in the money supply will affect price levels in the long run, and output in the short run. A change in the money supply, therefore, will directly determine prices, production, and employment.
Monetarism is an extension of the Keynesian economics that focuses on the use of monetary policy over fiscal policy to control aggregate demand. Monetary policy is a macroeconomic tool used in monetarism to shapen interest rates which controls money supply, such that when interest rates are increased, people are most likely to save than to spend and this reduces money supply. On the other hand, when interest rates are decreased following an expansionary monetary system, the rate of borrowing decreases and this means that people will have the tendency to borrow more and spend more, thereby activating the economy. Monetarism thus posits that the stable, moderate growth of the money supply could enable a steady rate of economic growth with low inflation.
Monetarism builds on the Keynesian theory by assuming the same macroeconomic framework and integrating the equation of exchange but instead focuses on the role played by money supply. Because they believe that V can be relatively easily predicted, monetarists argue that the equation of exchange could be resuscitated as an approach to stabilization policy, and they favor the use of monetary policy to do so.
Proponents of monetarism generally believe that controlling an economy through fiscal policy is a poor decision because it necessarily introduces microeconomic distortions that reduce economic efficiency. They prefer monetary policy as a tool to manage aggregate demand in a way that will be more neutral from a microeconomics standpoint and that avoids the deadweight losses and social costs that fiscal policy creates in markets.
In general, monetary policy can be characterized as contractionary or expansionary. Contractionary monetary policy is when the Federal Government reduces inflation by raising the federal government funds rate or decreasing the money supply. While Expansionary monetary policy works by expanding the money supply faster than usual or lowering short-term interest rates.

Name: Ogbonna Sandra Chinenye
Reg.No: 2019/245659
Department: Economics
Email: sandra.ogbonna.245659@unn.edu.ng

Topic : UNDERSTANDING MONETARISM
Monetarism is an economic school of thought which states that the supply of money in an economy is the primary driver of economic growth. As the availability of money in the system increases, aggregate demand for goods and services goes up. An increase in aggregate demand encourages job creation, which reduces the rate of unemployment and stimulates economic growth.
Background on Monetarism
Monetarists believe monetary policy is more effective than fiscal policy (government spending and tax policy). Stimulus spending adds to the money supply, but it creates a deficit adding to a country’s sovereign debt. That could increase interest rates.
Monetarists say that central banks are more powerful than the government because they control the money supply. They also tend to watch real interest rates rather than nominal rates. Most published rates are nominal rates, while real rates remove the effects of inflation. Real rates give a truer picture of the cost of money.
Milton Friedman Is the Father of Monetarism
Milton Friedman popularized the theory of monetarism in his 1967 address to the American Economic Association. He said that the antidote to inflation was higher interest rates, which in turn reduces the money supply. Prices then fall as people would have less money to spend.
Milton also warned against increasing the money supply too fast, which would be counter-productive by creating inflation. But a gradual increase is necessary to prevent higher unemployment rates.
Monetary policy: This is an economic tool used in monetarism, it is implemented to adjust interest rates that, in turn, control the money supply. When interest rates are increased, people have more of an incentive to save than to spend, thereby reducing or contracting the money supply. Contrarily, when interest rates are lowered following an expansionary monetary scheme, the cost of borrowing decreases, which means people can borrow more and spend more, thereby stimulating the economy.

The Quantity Theory of Money

Central to monetarism is the “quantity theory of money,” which monetarists adopted from earlier economic theories and integrated into the general Keynesian framework of macroeconomics. The quantity theory of money can be summarized in the equation of exchange, formulated by John Stuart Mill, which states that the money supply, multiplied by the rate at which money is spent per year, equals the nominal expenditures in the economy. The formula is given as:

\begin{aligned} &MV = PQ \\ &\textbf{where:} \\ &M = \text{money supply} \\ &V = \text{velocity (rate at which money changes hands)} \\ &P = \text{average price of a good or service} \\ &Q = \text{quantity of goods and services sold} \\ \end{aligned}​MV=PQwhere:M=money supplyV=velocity (rate at which money changes hands)P=average price of a good or serviceQ=quantity of goods and services sold​
A key point to note is that monetarists believe that changes to M (money supply) are the driver of the equation. In short, a change in M directly affects and determines employment, inflation (P), and production (Q). In the original version of the quantity theory of money, V is held to be constant, but this assumption was dropped by John Maynard Keynes and is not assumed by the monetarists, who instead believe that V is easily predictable.
Monetarist theory views velocity as generally stable, which implies that nominal income is largely a function of the money supply. Variations in nominal income reflect changes in real economic activity (the number of goods and services sold) and inflation (the average price paid for them).

In conclusion,it appears that there are two basic monetarist propositions that are of crucial importance, and they are as follows: (i) Cyclical and secular movements in nominal income are primarily attributable to movements in the stock of money relative to capacity output. (ii) There is no permanent tradeoff between unemployment and inflation or any other characteristic of the path of the price level — that is, the natural rate of unemployment hypothesis is valid.

Monetarism is a macroeconomics theory which states that government can foster economics stability by targeting the growth rate of the money supply. It is an economics school of thought which states that the supply of money in an economy is the primary driver of economics growth.
As the availability of money in the system increase aggregate demand for good and services goes up. An increase in aggregate demand encourage job creation, which reduce the rate of unemployment and stimulate economics growth
A monetarist is an economists who holds the strong belief that money supply ( physical currency, deposit and credit) is the primary factor affecting demand in an economy.
EXAMPLE: Most monetarist opposed the gold standard in that the limited supply of gold would stall the amount of money in the system, which would lead to inflation. Their also believe they should be controlled by the money supply, which is not possible under the gold standard unless gold is continually mined.
HOW IT IS WORK
When the money supply expand, it lower interest rates.. because banks having more to lend, so they are willing to charge lower rates .eg: consumer borrowing more to buy items like house automobiles and furniture. Decrease the money supply raises interest rates, making loan more expensive and this slow economics growth.

Monetarist is a macroeconomic theory which states that governments can foster economic stability by targeting the growth rate of the money supply. Essentially, it is a set of views based on the belief that the total amount of money in an economy is the primary determinant of economic growth.
What Is Monetarist Theory?
The monetarist theory is an economic concept that contends that changes in money supply are the most significant determinants of the rate of economic growth and the behavior of the business cycle. When monetarist theory works in practice, central banks, which control the levers of monetary policy, can exert much power over economic growth rates.
According to monetarist theory, money supply is the most important determinant of the rate of economic growth.
It is governed by the MV = PQ formula, in which M = money supply, V = velocity of money, P = price of goods, and Q = quantity of goods and services.
The Federal Reserve controls money in the United States and uses three main levers—the reserve ratio, discount rate, and open market operations—to increase or decrease money supply in the economy.
Understanding Monetarist Theory
According to monetarist theory, if a nation’s supply of money increases, economic activity will increase—and vice versa.

Monetarist theory is governed by a simple formula: MV = PQ, where M is the money supply, V is the velocity (number of times per year the average dollar is spent), P is the price of goods and services and Q is the quantity of goods and services. Assuming constant V, when M is increased, either P, Q, or both P and Q rise.

General price levels tend to rise more than the production of goods and services when the economy is closer to full employment. When there is slack in the economy, Q will increase at a faster rate than P under monetarist theory.

In the U.S., the Federal Reserve (Fed) sets monetary policy without government interference. The Fed operates on a monetarist theory that focuses on maintaining stable prices (low inflation), promoting full employment, and achieving steady gross domestic product (GDP) growth.

Controlling Money Supply
In the U.S., it is the job of the Fed to control the money supply. The Fed has three main levers:

The reserve ratio: The percentage of reserves a bank is required to hold against deposits. A decrease in the ratio enables banks to lend more, thereby increasing the supply of money.
The discount rate: The interest rate the Fed charges commercial banks that need to borrow additional reserves. A drop in the discount rate will encourage a bank to borrow more from the Fed and therefore lend more to its customers.
Open market operations: Open market operations consist of buying and selling government securities. Buying securities from large banks increases the supply of money, while selling securities contracts decreases the money supply in the economy.
Example of Monetarist Theory
Former Federal Reserve Chair Alan Greenspan was a proponent of monetarist theory. During his initial years at the Fed in 1988, he increased interest rates, decreasing growth and raising inflation rates, which almost touched five percent.

The U.S. economy tipped into recession during the early 1990s. In response, Chair Greenspan boosted economic prospects by commencing on a rate-cutting spree that resulted in the longest period of economic expansion in the history of the U.S. economy. A loose monetary policy of low interest rates made the U.S. economy prone to bubbles, culminating in the 2008 financial crisis and the Great Recession.

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Related Terms
Monetary Theory Definition
Monetary theory is a set of ideas about how changes in the money supply impact levels of economic activity. more
What Is Monetarism?
Monetarism is a macroeconomic theory, which states that governments can foster economic stability by targeting the growth rate of the money supply. more
What Is a Tight Monetary Policy?
A tight monetary policy refers to central bank policy aimed at cooling down an overheated economy and features higher interest rates and tighter money supply. more
Federal Reserve System (FRS) Definition
The Federal Reserve System is the central bank of the United States and provides the nation with a safe, flexible, and stable financial system. more
What Is the Multiplier Effect?
The multiplier effect measures the impact that a change in investment will have on final economic output. more
What Is Monetary Policy?
Monetary policy is a set of actions available to a nation’s central bank to achieve sustainable economic growth by adjusting the money supply. more
Related Articles

FISCAL POLICY

A Look at Fiscal and Monetary Policy

ECONOMICS

What Is the Quantity Theory of Money?

FEDERAL RESERVE

The Federal Reserve Chair’s Responsibilities

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What Methods Do Governments Use to Fight Inflation?

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Controlling Money Supply
In the U.S., it is the job of the Fed to control the money supply. The Fed has three main levers:

The reserve ratio: The percentage of reserves a bank is required to hold against deposits. A decrease in the ratio enables banks to lend more, thereby increasing the supply of money.
The discount rate: The interest rate the Fed charges commercial banks that need to borrow additional reserves. A drop in the discount rate will encourage a bank to borrow more from the Fed and therefore lend more to its customers.
Open market operations: Open market operations consist of buying and selling government securities. Buying securities from large banks increases the supply of money, while selling securities contracts decreases the money supply in the economy.
Example of Monetarist Theory
Former Federal Reserve Chair Alan Greenspan was a proponent of monetarist theory. During his initial years at the Fed in 1988, he increased interest rates, decreasing the money supply in the economy.
Example of Monetarist Theory
Former Federal Reserve Chair Alan Greenspan was a proponent of monetarist theory. During his initial years at the Fed in 1988, he increased interest rates, decreasing growth and raising inflation rates, which almost touched five percent.

The U.S. economy tipped into recession during the early 1990s. In response, Chair Greenspan boosted economic prospects by commencing on a rate-cutting spree that resulted in the longest period of economic expansion in the history of the U.S. economy. A loose monetary policy of low interest rates made the U.S. economy prone to bubbles, culminating in the 2008 financial crisis and the Great Recession.

Monetarism is a school of thought in monetary economics that emphasizes the role of governments in controlling the amount of money in circulation. Monetarist theory asserts that variations in the money supply have major influences on national output in the short run and on price levels over longer periods. Monetarists assert that the objectives of monetary policy are best met by targeting the growth rate of the money supply rather than by engaging in discretionary monetary policy. Monetarism is commonly associated with neoliberalism.

Monetarism today is mainly associated with the work of Milton Friedman, who was among the generation of economists to accept Keynesian economics and then criticise Keynes’s theory of fighting economic downturns using fiscal policy (government spending). Friedman and Anna Schwartz wrote an influential book, A Monetary History of the United States, 1867–1960, and argued “inflation is always and everywhere a monetary phenomenon”.

Though he opposed the existence of the Federal Reserve, Friedman advocated, given its existence, a central bank policy aimed at keeping the growth of the money supply at a rate commensurate with the growth in productivity and demand for goods.

KEYNESIAN, FRIEDMAN AND ANNA SCHWARTZ CONTRIBUTION TO MONETARIST ECONOMY
Monetarism is an economic theory that focuses on the macroeconomic effects of the supply of money and central banking. Formulated by Milton Friedman, it argues that excessive expansion of the money supply is inherently inflationary, and that monetary authorities should focus solely on maintaining price stability.

This theory draws its roots from two historically antagonistic schools of thought: the hard money policies that dominated monetary thinking in the late 19th century, and the monetary theories of John Maynard Keynes, who, working in the inter-war period during the failure of the restored gold standard, proposed a demand-driven model for money. While Keynes had focused on the stability of a currency’s value, with panics based on an insufficient money supply leading to the use of an alternate currency and collapse of the monetary system, Friedman focused on price stability.

The result was summarised in a historical analysis of monetary policy, Monetary History of the United States 1867–1960, which Friedman coauthored with Anna Schwartz. The book attributed inflation to excess money supply generated by a central bank. It attributed deflationary spirals to the reverse effect of a failure of a central bank to support the money supply during a liquidity crunch.

Friedman originally proposed a fixed monetary rule, called Friedman’s k-percent rule, where the money supply would be automatically increased by a fixed percentage per year. Under this rule, there would be no leeway for the central reserve bank, as money supply increases could be determined “by a computer”, and business could anticipate all money supply changes. Unreliable source. With other monetarists he believed that the active manipulation of the money supply or its growth rate is more likely to destabilise than stabilise the economy.

REFERENCES

How Milton Friedman Changed Economics, Policy and Markets”. The Wall Street Journal.
“Monetary Central Planning and the State, Part 27: Milton Friedman’s Second Thoughts on the Costs of Paper Money”. Archived from the original on November 14, 2012.
Friedman, Milton (1970). “A Theoretical Framework for Monetary Analysis”. Journal of Political Economy. 78 (2): 193–238 [p. 210]. doi:10.1086/259623. JSTOR 1830684.

The monetarist system is an economic system based on the macroeconomic theory of monetarism. According to Investopedia, Monetarism is a macroeconomic theory which states that governments can foster economic stability by targeting the growth rate of the money supply.
Monetarism is based on the equation of exchange by John Stuart mill. Monetarism says that the money supply is the primary determinant of economic growth . According to sarwat and Chris (2014), It is mainly associated with the Nobel prize winning economist Milton Friedman of the US in his seminal work “A monetary history of the united States 1867-1960” in 1963, which he coauthored with fellow economist, Anna Schwartz. It was proposed as a solution to America’s economic depression of the 1970’s.
On the equation of exchange, since the total money available is used for the purchase of goods and services the identity , since it is an equation, and can be mathematically stated thus ;
MV=PQ
Where M = Money supply (the total amount of money in the economy)
V = Velocity of money (the number of times that money changes hands in the economy)
P = price level
Q= aggregate goods and services produced in the economy
The right side being the demand side, the nominal GDP and the left being the money supply
In it’s original form the velocity of money was thought to be constant and therefore the money supply directly affects the price level and the aggregate production in the economy and according to the classical economists there is full employment in the long run .This implies that the money supply affects both price level and aggregate production in the short run and only price in the long run .
TENETS OF MONETARISM
According to sarwat and Chris (2014), the Quantity theory of money is the basis for several key tenets of monetarism. Some of these are ;
Long run monetary neutrality
Short run monetary non neutrality
Constant money growth rule
Interest rate flexibility
Long run monetary neutrality is the fact that money supply in the long run affects only the price level and not any real production
Short run monetary non neutrality implies that money supply has temporary effects on real output and employment as it takes time for wages and prices to adjust , thus they are referred to as ‘sticky’ in economic parlance
Constant money growth rule was emphasized by Milton Friedman where he believed that the FED (federal reserve, which plays a role identical to a central bank in America) should set money supply growth rate to be equal to the growth rate of real GDP. And the FED should be held accountable to a set of rules to avoid thee destabilization effect caused by discretionary policies.
Interest rate flexibility: The money growth rule was intended to allow interest rates, which affect the cost of credit, to be flexible to enable borrowers and lenders to take account of expected inflation as well as the variations in real interest rates.
The fact that the velocity of money is constant was refuted by the Keynesian economists led by John Maynard Keynes. The Keynesians proved that velocity of money was based on the institutions which affected the way people held money and therefore was is not constant and according to the balance, money has decreased in importance as a measure of liquidity as more people prefer to invest in the stock markets. A basic central difference between Keynesians and monetarists is that the Keynesians talk more or give more weight to unemployment while the monetarists give more weight to inflation and while the Keynesians say that inflation and unemployment are inversely related the monetarists say that only happens in the short run and there is no correlation in the short run. The difference between these two economic schools of thought have become more obscure that decades back.
According to the econweb lecture notes the velocity of money is not stable with empirical proof from a case study of the US. According to swart and Chris (2014), the velocity of money was once stable until 1981,from whence it started to vary from the stability once expected. Even though monetarism may have diminished in importance and the earlier recorded successes of Former FED chairman Paul Volcker, Former British prime minister Margaret thatcher and Former FED chairman Ben s. Bernanke in pulling their nations out of their respective inflations or recessions, the fact remains, inflation cannot go on for long without increase in money supply and controlling it should be the responsibility of the central bank.
However According to Investopedia, monetarist resuscitate the theory of monetarism by giving the reasons that the velocity of money is not stable but it can be predicted and then it is a better stabilization policy than fiscal policies as fiscal policies by the government usually introduces microeconomic distortion which is virtually non existent in the case of monetary policy as monetary policy .They prefer monetary policy as a tool to manage aggregate demand in a way that will be more neutral from a microeconomics standpoint and that avoids the deadweight losses and social costs that fiscal policy creates in markets.

REFERENCES
Sarwat Jahan and Chris Papageorgiou(2014) IMF Back to Basics. www. IMF.org
http://www.econweb.com/MacroWelcome/monetarism/notes.html
https://www.investopedia.com/terms/m/monetarism.asp#:~:text=Monetarism%20is%20an%20economic%20school,primary%20driver%20of%20economic%20growth.&text=When%20interest%20rates%20are%20increased,or%20contracting%20the%20money%20supply.
https://www.thebalance.com/monetarism-and-how-it-works-3305866

UGWUANYI NKEONYE LAUREL
2019/243315

Understanding Monetarism and Monetarist Micro Economics System:

Monetarism is a macroeconomic theory which states that governments can foster economic stability by targeting the growth rate of the money supply. Essentially, it is a set of views based on the belief that the total amount of money in an economy is the primary determinant of economic growth. Monetarism is a macroeconomic theory stating that governments can foster economic stability by targeting the growth rate of the money supply.
Central to monetarism is the quantity theory of money, which states that the money supply (M) multiplied by the rate at which money is spent per year (V) equals the nominal expenditures (P * Q) in the economy. Monetarism is closely associated with economist Milton Friedman, who argued that the government should keep the money supply fairly steady, expanding it slightly each year mainly to allow for the natural growth of the economy.
Monetarism is a branch of Keynesian economics that emphasizes the use of monetary policy over fiscal policy to manage aggregate demand, contrary to most Keynesians. Although most modern economists reject the emphasis on money growth that monetarists purported in the past, some core tenets of the theory have become a mainstay in nonmonetarist analysis.
Understanding Monetarism
Monetarism is an economic school of thought which states that the supply of money in an economy is the primary driver of economic growth. As the availability of money in the system increases, aggregate demand for goods and services goes up. An increase in aggregate demand encourages job creation, which reduces the rate of unemployment and stimulates economic growth.
Monetary policy, an economic tool used in monetarism, is implemented to adjust interest rates that, in turn, control the money supply. When interest rates are increased, people have more of an incentive to save than to spend, thereby reducing or contracting the money supply. Contrarily, when interest rates are lowered following an expansionary monetary scheme, the cost of borrowing decreases, which means people can borrow more and spend more, thereby stimulating the economy.

History of Monetarism:
Monetarism gained prominence in the 1970s, a decade characterized by high and rising inflation and slow economic growth. The policies of monetarism were responsible for bringing down inflation in the United States and the United Kingdom. After U.S. inflation peaked at 20% in 1979, the Fed switched its operating strategy to reflect monetarist theory. During this time period, economists, governments, and investors eagerly jumped at every new money supply statistic.

In general, monetary policy can be characterized as contractionary or expansionary. Contractionary monetary policy is when the Fed reduces inflation by raising the federal funds rate or decreasing the money supply. Expansionary monetary policy works by expanding the money supply faster than usual or lowering short-term interest rates.
In the years that followed, however, monetarism fell out of favor with many economists, as the link between different measures of money supply and inflation proved to be less clear than most monetarist theories had suggested. In addition, monetarism’s ability to explain the U.S. economy waned in the following decades. Many central banks today have stopped setting monetary targets and instead have adopted strict inflation targets.

Although most modern economists reject the emphasis on money growth that monetarists purported in the past, some core tenets of the theory have become a mainstay in nonmonetarist analysis. One of the most important of these ideas is that inflation cannot continue indefinitely without increases in the money supply. In addition, it is the responsibility (although not the primary goal) of the central bank to control inflation.

That being said, monetarist interpretations of past economic events are still relevant today. Ben Bernanke, former Fed Chairman, cited the work of Friedman in his decision to lower interest rates and increase the U.S. money supply in order to boost the economy during the global recession that began in 2007 in the United States.1

Milton Friedman and Monetarism:
Monetarism is closely associated with economist Milton Friedman, who argued, based on the quantity theory of money, that the government should keep the money supply fairly steady, expanding it slightly each year to allow for the natural growth of the economy. Due to the inflationary effects that can be brought about by the excessive expansion of the money supply, Friedman, who formulated the theory of monetarism, asserted that monetary policy should be done by targeting the growth rate of the money supply to maintain economic and price stability.

In his book, A Monetary History of the United States 1867–1960, Friedman proposed a fixed growth rate called the K-percent rule, suggesting that money supply should grow at a constant annual rate tied to the growth of nominal gross domestic product (GDP) and be expressed as a fixed percentage per year. This way, the money supply will be expected to grow moderately, businesses will be able to anticipate the changes to the money supply every year and plan accordingly, the economy will grow at a steady rate, and inflation will be kept at low levels.

The Quantity Theory of Money:
Central to monetarism is the “quantity theory of money,” which monetarists adopted from earlier economic theories and integrated into the general Keynesian framework of macroeconomics. The quantity theory of money can be summarized in the equation of exchange, formulated by John Stuart Mill, which states that the money supply, multiplied by the rate at which money is spent per year, equals the nominal expenditures in the economy. The formula is given as:

​

MV=PQ
where:
M=money supply
V=velocity (rate at which money changes hands)
P=average price of a good or service
Q=quantity of goods and services sold
​



A key point to note is that monetarists believe that changes to M (money supply) are the driver of the equation. In short, a change in M directly affects and determines employment, inflation (P), and production (Q). In the original version of the quantity theory of money, V is held to be constant, but this assumption was dropped by John Maynard Keynes and is not assumed by the monetarists, who instead believe that V is easily predictable.

Economic growth is a function of economic activity (Q) and inflation (P). If V is constant (or at least predictable), then an increase (or decrease) in M will lead to an increase (or decrease) in either P or Q.

An increase in P denotes that Q will remain constant, while an increase in Q means that P will be relatively constant. According to monetarism, variations in the money supply will affect price levels over the long term and economic output in the short term. A change in the money supply, therefore, will directly determine prices, production, and employment.

Real-World Examples of Monetarism:
HiIn Friedman’s seminal work, A Monetary History of the United States, 1867–1960, which he wrote with fellow economist Anna Schwartz, the two economists argued that failed monetary policy executed by the Federal Reserve was responsible for the Great Depression in the U.S. in the 1930s. In the view of Friedman and Schwartz, the Fed failed to relieve downward pressure on the money supply, and their eventual actions to reduce the money supply were the opposite of what they should have done. According to Friedman and Schwartz, markets tend towards a stable center; markets will behave erratically if the money supply is not properly set.

UNDERSTANDING MONETARISM AND MONETARY SYSTEM.

In order to understand this topic we therefore have to get a glimpse on the two terms here “MONETARISM” and “ MONETARY SYSTEM”.

What is Monetarism?
Monetarism is a macroeconomic theory which states that governments can foster economic stability by targeting the growth rate of the money supply. Essentially, it is a set of views based on the belief that the total amount of money in an economy is the primary determinant of economic growth. Monetarism is closely associated with economist Milton Friedman, who argued that the government should keep the money supply fairly steady, expanding it slightly each year mainly to allow for the natural growth of the economy. Thus, monetarism is a school of economic thought that maintains that the money supply (the total amount of money in an economy, in the form of coin, currency, and bank deposits) is the chief determinant on the demand side of short-run economic activity. American economist Milton Friedman is generally regarded as monetarism’s leading exponent. Friedman and other monetarists advocate a macroeconomic theory and policy that diverge significantly from those of the formerly dominant Keynesian school. The monetarist approach became influential during the 1970s and early ’80s.

MONETARIST THEORY
What Is Monetarist Theory? 
Monetary theory is a set of ideas about how changes in the money supply impact levels of economic activity.
The monetarist theory is an economic concept that contends that changes in money supply are the most significant determinants of the rate of economic growth and the behavior of the business cycle. When monetarist theory works in practice, central banks, which control the levers of monetary policy, can exert much power over economic growth rates.

In understanding Monetarism and Monetary Theory, Monetarism is an economic school of thought which states that the supply of money in an economy is the primary driver of economic growth. As the availability of money in the system increases, aggregate demand for goods and services goes up. An increase in aggregate demand encourages job creation, which reduces the rate of unemployment and stimulates economic growth.
Monetary policy, an economic tool used in monetarism, is implemented to adjust interest rates that, in turn, control the money supply. When interest rates are increased, people have more of an incentive to save than to spend, thereby reducing or contracting the money supply. Contrarily, when interest rates are lowered following an expansionary monetary scheme, the cost of borrowing decreases, which means people can borrow more and spend more, thereby stimulating the economy. Monetarism is closely associated with economist Milton Friedman, who argued, based on the quantity theory of money, that the government should keep the money supply fairly steady, expanding it slightly each year to allow for the natural growth of the economy. Due to the inflationary effects that can be brought about by the excessive expansion of the money supply, Friedman, who formulated the theory of monetarism, asserted that monetary policy should be done by targeting the growth rate of the money supply to maintain economic and price stability. In his book, A Monetary History of the United States 1867–1960, Friedman proposed a fixed growth rate called the K-percent rule, suggesting that money supply should grow at a constant annual rate tied to the growth of nominal gross domestic product (GDP) and be expressed as a fixed percentage per year. This way, the money supply will be expected to grow moderately, businesses will be able to anticipate the changes to the money supply every year and plan accordingly, the economy will grow at a steady rate, and inflation will be kept at low levels.

Then in understanding Monetary theory, According to monetarist theory, if a nation’s supply of money increases, economic activity will increase—and vice versa. Monetarist theory is governed by a simple formula: MV = PQ, where M is the money supply, V is the velocity (number of times per year the average dollar is spent), P is the price of goods and services and Q is the quantity of goods and services. Assuming constant V, when M is increased, either P, Q, or both P and Q rise. General price levels tend to rise more than the production of goods and services when the economy is closer to full employment. When there is slack in the economy, Q will increase at a faster rate than P under monetarist theory.
In the U.S., the Federal Reserve (Fed) sets monetary policy without government interference. The Fed operates on a monetarist theory that focuses on maintaining stable prices (low inflation), promoting full employment, and achieving steady gross domestic product (GDP) growth.

Example of Monetarist Theory 
Former Federal Reserve Chair Alan Greenspan was a proponent of monetarist theory. During his initial years at the Fed in 1988, he increased interest rates, decreasing growth and raising inflation rates, which almost touched five percent.
The U.S. economy tipped into recession during the early 1990s. In response, Chair Greenspan boosted economic prospects by commencing on a rate-cutting spree that resulted in the longest period of economic expansion in the history of the U.S. economy. A loose monetary policy of low interest rates made the U.S. economy prone to bubbles, culminating in the 2008 financial crisis and the Great Recession.

REFERENCES

The New School’s Economics Department’s History of Economic Thought website.
McCallum, Bennett T. (2008). “Monetarism”. In David R. Henderson (ed.). Concise Encyclopedia of Economics (2nd ed.). Indianapolis: Library of Economics and Liberty. ISBN 978-0865976658. OCLC 237794267.
Monetarism from the Economics A–Z of The Economist

Name: Omada Dorathy Amarachi
Reg No: 2017/243131
Department: Economics Education
Course Title: Introduction To Macro Economics II
Course Code: Eco 204

Assignment
Discuss on monetarist in macro Economics system and write about the main central idea of the monetarist.
The monetarist theory (also referred to as “monetarism”) is a fundamental macroeconomic theory that focuses on the importance of the money supply as a key economic force. The monetarist believe that money supply is a primary determinant of price levels and inflation. Increasing money supply, according to the theory, inevitably leads to higher prices and inflation, while decreasing the money supply leads to deflation and risks, causing a recession. Changes in the money supply also affect employment and production levels, but the monetarist theory asserts that those effects are only temporary, while the effect on inflation is more long-lasting and significant.
While economist Clark Warburton initially posited much of the monetarist theory immediately following World War II, Milton Friedman is recognized as the primary advocate of modern-day monetarism. The monetarist theory was expounded by Friedman in a book he co-wrote with Anna Schwartz, “A Monetary History of the United States, 1867–1960,” and in a 1967 speech at the American Economic Association. Interestingly, while the monetarist theory is essentially a guide for central bank policies, Friedman was opposed to the whole idea of central banks, such as the Federal Reserve Bank in the United States. In fact, Friedman blamed much of the Great Depression of the 1930s on the Federal Reserve, arguing that the Fed tightened the money supply at the very moment that it should have been expanding it to stimulate economic growth..
Given that central banks do exist, Friedman argued that monetary policy – the expansion or contraction of the money supply – is a much more effective tool for influencing the economy than fiscal policy – the government’s taxation and spending activities. The central bank of a country can expand or contract the money supply through the manipulation of interest rates. For example, in the United States, the Federal Reserve can change the Fed Funds Rate – the interest rate at which banks can lend money overnight to other banks. The Fed funds rate affects all other interest rates in the economy. When the Fed funds rate is higher, interest rates increase overall. It decreases the amount of money lent to businesses and consumers, thus reducing spending and economic growth. Conversely, lowering interest rates increases borrowing by consumers and businesses, thus boosting spending and stimulating economic growth.
There is an underlying equation that forms the foundation of the monetarist theory. It is known as the “equation of exchange” (also referred to as the “quantity theory of money”). Although the equation’s become quite complex due to its expansion and refinement by recent economists, the basic equation is expressed as follows where:
M is the money supply.
V is the velocity of money (the rate of turnover at which a single unit of currency – e.g., one dollar – is spent in one year).
P is the average price level for transactions in the economy (the purchase of goods and services)
Q is the total quantity of goods and services produced – i.e., economic output or production.
According to the monetarist theory, V (the velocity of money) remains relatively stable. Therefore, it changes M (the money supply) that primarily affects prices and economic production. There are several main points that the monetarist theory derives from the equation of exchange. An increase in the money supply will lead to overall price increases in the economy. Increased money supply will result in only short-term effects on economic output (i.e., Gross Domestic Product – GDP) and employment levels.
The best monetary policy for a central bank to follow is to peg the money supply’s growth rate to match the rate of growth of real GDP – it is the best policy to support continuing economic growth and keep the rate of inflation relatively low.
The last point is the key to the monetarist theory. Monetarist economists believe that the central bank’s manipulation of the money supply should be restricted. They believe that a central bank that more actively attempts to change the money supply is more likely to harm the economy than to benefit it. However, this contention may be heavily tied to the monetarists’ basic distrust of central banks as an institution. The idea runs counter to the Keynesian Economic Theory, which favors active, unrestricted intervention by the central bank. Monetarism is closely associated with economist Milton Friedman, who argued, based on the quantity theory of money, that the government should keep the money supply fairly steady, expanding it slightly each year to allow for the natural growth of the economy. Due to the inflationary effects that can be brought about by the excessive expansion of the money supply, Friedman, who formulated the theory of monetarism, asserted that monetary policy should be done by targeting the growth rate of the money supply to maintain economic and price stability.
According to monetarist theory, if a nation’s supply of money increases, economic activity will increase—and vice versa. Monetarist theory is governed by a simple formula: MV = PQ, where M is the money supply, V is the velocity (number of times per year the average dollar is spent), P is the price of goods and services and Q is the quantity of goods and services. Assuming constant V, when M is increased, either P, Q, or both P and Q rise. General price levels tend to rise more than the production of goods and services when the economy is closer to full employment. When there is slack in the economy, Q will increase at a faster rate than P under monetarist theory.
Milton Friedman who is regarded as an advocate of the monetarist theory contended that the government should seek to promote economic stability, but only by controlling the rate of growth of the money supply. It could achieve this by following a simple rule that stipulates that the money supply be increased at a constant annual rate tied to the potential growth of gross domestic product (GDP) and expressed as a percentage (e.g., an increase from 3 to 5 percent). Monetarism thus posited that the steady, moderate growth of the money supply could in many cases ensure a steady rate of economic growth with low inflation.

Name; Onugwu Uzonna Michael
Reg. No; 2019/245479
Dept.; ECONOMICS
TOPIC;
MONETARISM AND MONETARIST ECONOMY
Monetarism: is a macroeconomic theory which states that governments can foster economic stability by targeting the growth rate of the money supply. Essentially, it is a set of views based on the belief that the total amount of money in an economy is the primary determinant of economic growth.
Monetarism is an economic school of thought which states that the supply of money in an economy is the primary driver of economic growth. As the availability of money in the system increases, aggregate demand for goods and services goes up. An increase in aggregate demand encourages job creation, which reduces the rate of unemployment and stimulates economic growth.
Monetary policy, an economic tool used in monetarism, is implemented to adjust interest rates that, in turn, control the money supply. When interest rates are increased, people have more of an incentive to save than to spend, thereby reducing or contracting the money supply. Contrarily, when interest rates are lowered following an expansionary monetary scheme, the cost of borrowing decreases, which means people can borrow more and spend more, thereby stimulating the economy.
A monetarist is an economist who holds the strong belief that money supply including physical currency, deposits, and credit is the primary factor affecting demand in an economy. Consequently, the economy’s performance its growth or contraction can be regulated by changes in the money supply. The key driver behind this belief is the impact of inflation on an economy’s growth or health and the idea that by controlling the money supply, one can control the inflation rate. The most well-known monetarist is Milton Friedman, who wrote the first serious analysis using monetarist theory in his 1963 book, A Monetary History of The United States, 1867–1960. In the book, Friedman along with Anna Jacobson Schwartz argued in favor of monetarism as a way to combat the economic impacts of inflation. They argued that a lack of money supply amplified the financial crisis of the late 1920s and led to the Great Depression, and that a steady increase in the money supply in line with growth in the economy would produce growth without inflation. The monetarist view was a minority view in both academic and applied economics until the financial troubles of the 1970s. As unemployment and inflation soared, the dominant economic theory Keynesian economics was unable to explain the current economic puzzle presented by economic contraction and simultaneous inflation.
EFFECT OF MONETARISM ON THE LONG RUN
Monetarists believe monetary policy is more effective than fiscal policy (government spending and tax policy). Stimulus spending adds to the money supply, but it creates a deficit adding to a country’s sovereign debt. That could increase interest rates. Monetarists
say that central banks are more powerful than the government because they control the money supply.
They also tend to watch real interest rates rather than nominal rates. Most published rates are nominal rates, while real rates remove the effects of inflation. Real rates give a truer picture of the cost of money. Money Supply Monetarism has recently gone out of favor. Money supply has become a less useful measure of liquidity than in the past. However, the money supply does not measure other assets, such as stocks, commodities and home equity. People are more likely to save money by investing in the stock market because they receive a better return. That means the money supply does not measure these assets. If the stock market rises, people feel wealthy and are inclined to spend more. An increase in spending increases demands, which boosts the economy. Stocks, commodities and home equity created economic booms that the Fed (the Federal Reserve) ignored. The Great Recession was fueled in part by the creation of a housing market bubble (home values rising, loans being approved for people who couldn’t afford them, and money being made by investors on the loans), which burst and took much of
the economy with it.
When the money supply expands, it lowers interest rates. This is due to banks having more to lend, so they are willing to charge lower rates. That means consumers borrow more to buy items like houses, automobiles, and furniture. Decreasing the money supply raises interest rates, making loans more expensive this slows economic growth.

References:
https://www.thebalance.com/monetarism-and-how-it-works-3305866 https://www.investopedia.com/terms/m/monetarist.asp
https://www.imf.org/external/pubs/ft/fandd/2014/03/basics.htm
https://en.m.wikipedia.org/wiki/Monetarism

Ngene Francisca onyeka
Economics
2019/249518
Monetarism?
Monetarism is a macroeconomic theory which states that governments can foster economic stability by targeting the growth rate of the money supply. Essentially, it is a set of views based on the belief that the total amount of money in an economy is the primary determinant of economic growth.

KEY TAKEAWAYS
Monetarism is a macroeconomic theory stating that governments can foster economic stability by targeting the growth rate of the money supply.
Central to monetarism is the quantity theory of money, which states that the money supply (M) multiplied by the rate at which money is spent per year (V) equals the nominal expenditures (P * Q) in the economy.
Monetarism is closely associated with economist Milton Friedman, who argued that the government should keep the money supply fairly steady, expanding it slightly each year mainly to allow for the natural growth of the economy.
Monetarism is a branch of Keynesian economics that emphasizes the use of monetary policy over fiscal policy to manage aggregate demand, contrary to most Keynesians.
Although most modern economists reject the emphasis on money growth that monetarists purported in the past, some core tenets of the theory have become a mainstay in nonmonetarist analysis.
Understanding Monetarism
Monetarism is an economic school of thought which states that the supply of money in an economy is the primary driver of economic growth. As the availability of money in the system increases, aggregate demand for goods and services goes up. An increase in aggregate demand encourages job creation, which reduces the rate of unemployment and stimulates economic growth.

Monetary policy, an economic tool used in monetarism, is implemented to adjust interest rates that, in turn, control the money supply. When interest rates are increased, people have more of an incentive to save than to spend, thereby reducing or contracting the money supply. Contrarily, when interest rates are lowered following an expansionary monetary scheme, the cost of borrowing decreases, which means people can borrow more and spend more, thereby stimulating the economy.

Milton Friedman and Monetarism
Monetarism is closely associated with economist Milton Friedman, who argued, based on the quantity theory of money, that the government should keep the money supply fairly steady, expanding it slightly each year to allow for the natural growth of the economy. Due to the inflationary effects that can be brought about by the excessive expansion of the money supply, Friedman, who formulated the theory of monetarism, asserted that monetary policy should be done by targeting the growth rate of the money supply to maintain economic and price stability.

In his book, A Monetary History of the United States 1867–1960, Friedman proposed a fixed growth rate called the K-percent rule, suggesting that money supply should grow at a constant annual rate tied to the growth of nominal gross domestic product (GDP) and be expressed as a fixed percentage per year. This way, the money supply will be expected to grow moderately, businesses will be able to anticipate the changes to the money supply every year and plan accordingly, the economy will grow at a steady rate, and inflation will be kept at low levels.

The Quantity Theory of Money
Central to monetarism is the “quantity theory of money,” which monetarists adopted from earlier economic theories and integrated into the general Keynesian framework of macroeconomics. The quantity theory of money can be summarized in the equation of exchange, formulated by John Stuart Mill, which states that the money supply, multiplied by the rate at which money is spent per year, equals the nominal expenditures in the economy. The formula is given as:

M
V
=
P
Q
where:
M
=
money supply
V
=
velocity (rate at which money changes hands)
P
=
average price of a good or service
Q
=
quantity of goods and services sold

​
MV=PQ
where:
M=money supply
V=velocity (rate at which money changes hands)
P=average price of a good or service
Q=quantity of goods and services sold
​


A key point to note is that monetarists believe that changes to M (money supply) are the driver of the equation. In short, a change in M directly affects and determines employment, inflation (P), and production (Q). In the original version of the quantity theory of money, V is held to be constant, but this assumption was dropped by John Maynard Keynes and is not assumed by the monetarists, who instead believe that V is easily predictable.

Economic growth is a function of economic activity (Q) and inflation (P). If V is constant (or at least predictable), then an increase (or decrease) in M will lead to an increase (or decrease) in either P or Q.

An increase in P denotes that Q will remain constant, while an increase in Q means that P will be relatively constant. According to monetarism, variations in the money supply will affect price levels over the long term and economic output in the short term. A change in the money supply, therefore, will directly determine prices, production, and employment.

Monetarism vs. Keynesian Economics
The view that velocity is constant is a source of contention among Keynesians, who believe that velocity should not be constant since the economy is volatile and subject to periodic instability. Instead, Keynes’ liquidity preference theory emphasizes how changes in money demand (and thus velocity) influence the price level and aggregate demand.

Monetarism builds on the Keynesian theory by assuming the same macroeconomic framework and integrating the equation of exchange (with V swinging cyclically, as Keynes argued), but instead focuses on the role played by money supply. Because they believe that V can be relatively easily predicted, monetarists argue that the equation of exchange could be resuscitated as an approach to stabilization policy, and they favor the use of monetary policy to do so.

Proponents of monetarism generally believe that controlling an economy through fiscal policy is a poor decision because it necessarily introduces microeconomic distortions that reduce economic efficiency. They prefer monetary policy as a tool to manage aggregate demand in a way that will be more neutral from a microeconomics standpoint and that avoids the deadweight losses and social costs that fiscal policy creates in markets.

History of Monetarism
Monetarism gained prominence in the 1970s, a decade characterized by high and rising inflation and slow economic growth. The policies of monetarism were responsible for bringing down inflation in the United States and the United Kingdom. After U.S. inflation peaked at 20% in 1979, the Fed switched its operating strategy to reflect monetarist theory. During this time period, economists, governments, and investors eagerly jumped at every new money supply statistic.

In general, monetary policy can be characterized as contractionary or expansionary. Contractionary monetary policy is when the Fed reduces inflation by raising the federal funds rate or decreasing the money supply. Expansionary monetary policy works by expanding the money supply faster than usual or lowering short-term interest rates.
In the years that followed, however, monetarism fell out of favor with many economists, as the link between different measures of money supply and inflation proved to be less clear than most monetarist theories had suggested. In addition, monetarism’s ability to explain the U.S. economy waned in the following decades. Many central banks today have stopped setting monetary targets and instead have adopted strict inflation targets.

Although most modern economists reject the emphasis on money growth that monetarists purported in the past, some core tenets of the theory have become a mainstay in nonmonetarist analysis. One of the most important of these ideas is that inflation cannot continue indefinitely without increases in the money supply. In addition, it is the responsibility (although not the primary goal) of the central bank to control inflation.

That being said, monetarist interpretations of past economic events are still relevant today. Ben Bernanke, former Fed Chairman, cited the work of Friedman in his decision to lower interest rates and increase the U.S. money supply in order to boost the economy during the global recession that began in 2007 in the United States.

Monetarist System
The monetarist theory is an economic concept that contends that changes in money supply are the most significant determinants of the rate of economic growth and the behavior of the business cycle. When monetarist theory works in practice, central banks, which control the levers of monetary policy, can exert much power over economic growth rates.

The competing theory to the monetarist theory is Keynesian economics.

KEY TAKEAWAYS
According to monetarist theory, money supply is the most important determinant of the rate of economic growth.
It is governed by the MV = PQ formula, in which M = money supply, V = velocity of money, P = price of goods, and Q = quantity of goods and services.
The Federal Reserve controls money in the United States and uses three main levers—the reserve ratio, discount rate, and open market operations—to increase or decrease money supply in the economy.
Understanding Monetarist Theory
According to monetarist theory, if a nation’s supply of money increases, economic activity will increase—and vice versa.

Monetarist theory is governed by a simple formula: MV = PQ, where M is the money supply, V is the velocity (number of times per year the average dollar is spent), P is the price of goods and services and Q is the quantity of goods and services. Assuming constant V, when M is increased, either P, Q, or both P and Q rise.

General price levels tend to rise more than the production of goods and services when the economy is closer to full employment. When there is slack in the economy, Q will increase at a faster rate than P under monetarist theory.

Monetarism is a macroeconomic theory which states that governments can foster economic stability by targeting the growth rate of the money supply. Essentially, it is a set of views based on the belief that the total amount of money in an economy is the primary determinant of economic growth.
The monetarist theory is an economic concept that contends that changes in money supply are the most significant determinants of the rate of economic growth and the behavior of the business cycle.
 
WHO IS A MONETARIST?
A monetarist is an economist who holds the strong belief that money supply—including physical currency, deposits, and credit—is the primary factor affecting demand in an economy. Consequently, the economy’s performance—its growth or contraction—can be regulated by changes in the money supply. Milton Friedman was the first monetarist.
 
 
HOW MONETARIST EXPLAINS INFLATION
 
 
Monetarists argue that if the Money Supply rises faster than the rate of growth of nThe theoretical foundation of the monetarist system is the Quantity Theory of Money. Markets work well when left to themselves. Government intervention can often times destabilize things more the national income, then there will be inflation. … “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.
 

Introduction
Monetarism gained prominence in the 1970sbringing down inflation in the United States and United Kingdomand greatly influenced the U.S. central bank’s decision to stimulate the economy during the global recession of 200709. Today, monetarism is mainly associated with Nobel Prizewinning economist Milton Friedman.
Meaning of monetary economic system:
The monetarist theory is an economic concept that believes that changes in money supply are the major significant determinants of the economic growth rate and the how business cycle behaves. It can also be seen as a set of ideas about how changes in the money supply impact levels of economic activities or that money supply is the key driver of economic activities. The practical aspect of monetarist theory is majorly seen in central banks, which control the levers of monetary policy, and can exert much power over economic growth rates. In many developing economy as Nigeria, monetary theory is controlled by the central government which may also be conducting most if the monetary policy decisions. The Central Government operates on a monetary theory that focuses on maintaining stable prices (low inflation), promoting full employment, and achieving steady growth in gross domestic product (GDP). The idea is that markets function best when the economy follows a smooth course, with stable prices and adequate access to capital for corporations and individuals.
According to monetarist theory, if there is an increase in a nation’s supply of money, it brings about an increase in economic activityand vice versa.
Monetarist theory is governed by a simple formula: MV = PQ, where M is the money supply, V is the velocity (number of times per year the average dollar is spent), P is the price of goods and services and Q is the quantity of goods and services. Assuming constant V, when M is increased, either P, Q, or both P and Q rise.
General price levels tend to rise more than the production of goods and services when the economy is closer to full employment. When there is slack in the economy, Q will increase at a faster rate than P under monetarist theory.
Some tenets that monetary system holds tenaciously
Reserve ratio: The percentage of reserves a bank is required to hold against deposits. A decrease in the ratio enables banks to lend more, thereby increasing the supply of money.
Discount rate: The interest rates the Fed charges commercial banks that need to borrow additional reserves. A drop in the discount rate will encourage banks to borrow more from the Fed and therefore lend more to its customers.
Open market operations (OMO): OMO consists of buying and selling government securities. Buying securities from large banks increases the supply of money while selling securities contracts money supply in the economy
Criticisms of Monetary Theory
Not everyone agrees that boosting the amount of money in circulation is wise. Some economists warn that such behavior can lead to a lack of discipline and, if not managed properly, cause inflation to spike, destroying gradually the value of savings, triggering uncertainty, and discouraging firms from investing, among other things. The premise that taxation can fix these problems has also come under fire. Taking more money from paychecks is a deeply unpopular policy, particularly when prices are rising, meaning that many politicians are hesitant to pursue such measures. Critics also point out that higher taxation will end up triggering a further increase in unemployment, destroying the economy even more.
Japan is often cited as an example. The country has run fiscal deficits for decades now, with mixed results. Critics regularly point out that continual deficit spending there has forced more people out of work and done little boost GDP growth.

References.
Andersen Leonall C. Federal Reserve Defensive’.
Operations and Short-Run Control of the Money Stock.
Journal of Political Economy, March-April 1968. P275-88.
Will Kenton (2021). monetarist theory.

Daniel liberto (2021). Monetary theory.

https//:www.investopedia.com

Monetarism is a macro-economic theory which states that governments can foster economic stability by targeting the growth rate of the money supply.
Essentially, it is a set of views based on the belief that the total amount of money in an Economy is the primary determinant of Economic growth.
Key Notes of Monatarist Macroeconomic system
1) monatarism is a macroeconomic theory stating that governments can foster economic stability by targeting the growth rate of the money supply
2)central to monetarism is the quantity theory of Money which states that the money supply (M) Multiplied by the rate at which Money is spent per uear (V) Equals the nominal Expenditures (p*Q) in the Economy
3)Monetarism is closely associated with Economist Milton Friedman, who argued that the government should keep the money supply fairly steady ,expanding it slightly each year mainly to allow for the natural growth of the Economy
4)Monetarism os a branch of keynesian Economic that Emphasizes the use of monetary policy over fiscal policy to manage aggregate demand, Contrary to most keynesian.
Although most moderm Economist reject the Emphasis on money growth that monetarist purported in the past,some core tenets of the theory have become a mainstay in analysis.
UNDERSTANDING MONETARISM
Monetaris is an Economic School of thought Which states that the supply of money in an Economy is the primary driver of Economic growth. As the Availability of money in the system increases,aggregate demand for goods and services goes up.An increase in aggregate demand Encourages nob Creation, which reduces the rate of unemployment and stimulates Economic growth.
Monetary Policy as an Economy Tool
Monetarism is implemented to adjust interests rates that inturn control the money supply.When interests rate are increased, people have more of an incentives to save than to spend, thereby reducing or contracting the money supply. Contrarily When interests rates are lowered following an Expansionary monetary scheme,the cost of borrowing decreases,which means people can borrow more and spend more, thereby stimulating the Economy.
A key point to note is that monetarists believe that changes to M (money supply) are the driver of the Equation in short a change in M directly affects and determines employment inflation (P) and production (Q), in the original version of the quantity theory of Money, V is held to be constant,but this assumption Was dropped by (john maynard Keynes).
Proponents of Monetarism generally believe that Controlling an Economy through policy is a poor decision because.it necessarily introduces microEconomics distortions that reduce Economic Efficiency They Profer Monetary policy as a tool to manage aggregate demand in a way that will be more neutral from a micro Economic Stand Point and that avoids the deadweight losses and social Costs that Fiscal policy Creates in Markets
Important notes: in general,monetary policy can be characterized as contractionary or Expansionary.
Contractionary Monetary policy is When the federal government reduces inflation by raising the funds rate or decreasing the money supply.
Expansionary monetary policy works by Expanding the money supply faster than usual or lowering shortterm interest rate
In Friedman Seminal Work,A monetary History of the United States,1867-1960.Which he wrote With fellow Economist Anna Schwartz,the two Economist argued that failed monetary policy Executed by the federal reserve Was responsible for the Great depression in the U.S in the 1930s in the view of Friedman and Schwartz, the Federal reserve failed to lelieve downward pressure on the money supply, and their eventaul actions to reduce the money supply Were the Opposite of what they should have done.According to Friedman and Schwartz,market tend towards a stable center, Markets will behave erractically if the money supply is not properly set.
.

MONETARIST MACROECONOMIC SYSTEM.
Monetarist is a macroeconomics theory which states that governments can foster economic stability by targeting the growth rate of the money supply. Essentially, it is a set of views based on the belief that the total amount of money in an economy is the primary determinant of economic growth.
Monetarism is an economic school of thought which states that the supply of money is an economy is the primary driver of economic growth. As the availability of money I the system increases, aggregate demand for goods and services goes up. An increase in aggregate demand encourages job creation, which reduces the rate of unemployment and stimulates economic growth
It can also be defined as emphasis on the role of governments in controlling the amounts in circulation. Those who this view we call monetarist or monetary economists.
Monetarist believe monetary policy is more effective in influencing economic activity. money has a significant role to play in the modern economy. Money is not only as a means of payment, but it also becomes a commodity to be transacted.
In general, monetary policy can be characterized as contractionary or expansionary. Contractionary monetary policy is when the fed reduces inflation by raising the federal funds rate or decreasing the money supply. Expansionary monetary policy works by expanding the money supply faster than usual or lowering short term interest rates.
Milton Friedman is the father of monetarism, he popularized the theory in his 1967 address to the America economic association. He argued based on the quantity theory of money, that the government should keep the money supply fairly steady, expanding it slightly each year to allow for the natural growth of the economy.
THE QUANTITY THEORY OF MONEY
The quantity theory of money can be summarized in the equation of exchange, formulated by john Stuart mill, which states that the money supply, multiplied by the rate at which money is spent per year, equals the nominal expenditures in the economy. The formula is given as: MV = PQ
Where;
M = money supply
V = velocity (rate at which money changes hand)
P = average price of a good or service
Q = quantity of goods and services sold
A key point to note is that monetarist believe that changes to M (money supply) are the driver of the equation. In short, a change in M directly affects and determines employments, inflation (P), and production (Q). In the original version of the quantity theory of money, V is held constant, but consumption was dropped by John Maynard Keynes and is not assumed by the monetarist, who instead believe that V is easily predictable.
Economic growth is a function of economic activity (Q) and inflation (P). if V is constant (or at least predictable), then an increase (or decrease) in M will lead to an increase (or decrease) in either P or Q.
An increase in P denotes that Q will remain constant, while an increase in Q means that P will be relatively constant, according to monetarist, variations in the money supply will affect price levels over the long term and economic output in the short term. A change in the money supply, therefore, will directly determine prices, production, and employment.
CHARACTERISTIC OF MONETARISM.
Monetarism is a mixture of theoretical ideas, philosophical beliefs, and policy prescriptions.
The theoretical foundation is the quantity theory of money
The economy is inherently stable. Markets work well when left to themselves. Government intervention can often times destabilize things more than they help. Laissesz faire is often the best advice.
The fed should be bound to fixed rules in conducting monetary policy. They should not have discretion in conducting policy because they could make the economy worse off.
Fiscal policy is often bad policy. A small role for government is good.
CRITICISMS OF MONETARISM
The link between the money supply and inflation is often very weak in practice.
The velocity of circulation (V) is not stable but can vary significantly due to confidence, changes in the use of credit cards, decline in use of cash. etc.
Targeting arbitrary money supply targets can cause a severe recession and high unemployment. For example, UK targeted money supply growth in the early 1980s, but this caused the recession of 1981 with many economists arguing it was deeper than necessary.
The large increase in the monetary base following the 2009 recession did not cause any inflationary pressures.
Why not target inflation directly? If you want to control inflation, it makes more sense to target inflation directly rather than through the intermediary of the money supply.
 Monetarists say that income can vary in the short run, but the short run could be a long time and therefore make monetary policy ineffective, Keynesians argue that the LRAS is not necessarily inelastic they argue that the economy can be below full capacity for a long time.
ADVANTAGES OF MONETARY POLICY
1. Expansionary monetary policy makes it possible for more investments come in and consumers spend more.
2. Lowered interest rates also lower mortgage payment rates.
3. It allows the Central Bank to apply quantitative easing.
4. It promotes predictability and transparency.
DISADVANTAGES OF MONETARY POLICY
1. Despite expansionary monetary policy, there is still no guaranteed economy recovery.
2. Cutting interest rates is not a guarantee.
3. It will not be useful during global recession.
4. Contractionary monetary policy can discourage businesses from expansion.

NAME: OFFOR UGOCHUKWU IKENNA
REG NO:2019/245050
E-MAIL: ugosagacios@gmail.com

We have different school of thoughts in economics. They are; classical, neo-classical, Keynesian and Monetarist. But today, we are going to be focusing on the Monetarist school of thought that was propounded by Milton Friedman. Monetarism’s rise to intellectual prominence began with writings on basic monetary theory by Friedman and other University of Chicago economists during the 1950s, writings that were influential because of their adherence to fundamental neoclassical principles. It emphasizes the role of governments in controlling the amount of money in circulation. Monetarist theory asserts that variations in the money supply have major influences on national output in the short run and on price levels over longer periods. Monetarists assert that the objectives of monetary policy are best met by targeting the growth rate of the money supply rather than by engaging in discretionary monetary policy. Monetarism is commonly associated with neoliberalism.
Moreover, it is a macro-economic school of thought that emphasizes long-run monetary neutrality, short-run monetary non-neutrality, the distinction between real and nominal INTEREST RATES, and the role of monetary aggregates in policy analysis. An economy possesses basic long-run monetary neutrality if an exogenous increase of Z percent in its stock of money would ultimately be followed, after all adjustments have taken place, by a Z percent increase in the general price level, with no effects on real variables (e.g., consumption, output, relative prices of individual commodities). While most economists believe that long-run neutrality is a feature of actual market economies, at least approximately, no other group of macroeconomists emphasizes this proposition as strongly as do monetarists. Also, some would object that, in practice, actual central banks almost never conduct policy so as to involve exogenous changes in the MONEY SUPPLY. This objection is correct factually but irrelevant: the crucial matter is whether the supply and demand choices of households and businesses reflect concern only for the underlying quantities of goods and services that are consumed and produced. If they do, then the economy will have the property of long-run neutrality, and thus the above-described reaction to a hypothetical change in the money supply would occur. The original monetarists all emphasized the role of monetary aggregates—such as M1, M2, and the monetary base—in monetary policy analysis, but details differed between Friedman and Schwartz, on the one hand, and Brunner and Meltzer, on the other. Friedman’s striking and famous recommendation was that, irrespective of current macroeconomic conditions, the stock of money should be made to grow “month by month, and indeed, so far as possible, day by day, at an annual rate of X per cent, where X is some number between 3 and 5.”Brunner and Meltzer also favored monetary policy rules but recognized the attractiveness of activist rules that relate money growth rates to prevailing economic conditions. Also, they typically concentrated on the monetary base, adjusted to reflect changes in reserve requirements, whereas Friedman was more concerned with M2 or M1 and, indeed, sought major changes in banking legislation, such as 100 percent reserve requirements on deposits, designed to make the chosen aggregate precisely controllable.
Friedman’s constant-money-growth rule, rather than other equally fundamental aspects of monetarism, attracted the most attention, thereby detracting from the understanding and appreciation of monetarism. In particular, this led to the comparative neglect of Friedman’s crucial “accelerationist” or “natural-rate” hypothesis, according to which there is no long-run trade-off between inflation and unemployment; that is, the long-run PHILLIPS CURVE is vertical. The no-trade-off view was also promoted by Brunner and Meltzer. Accordingly, it might be argued that the two fundamental monetarist propositions are (1) that cyclical movements in nominal income are primarily attributable to movements in the stock of money, and, (2) that there is no permanent trade-off between unemployment and inflation. Together, these lead to monetarist-style policy positions. This theory draws its roots from two historically antagonistic schools of thought: the hard money policies that dominated monetary thinking in the late 19th century, and the monetary theories of John Maynard Keynes, who, working in the inter-war period during the failure of the restored gold standard, proposed a demand-driven model for money.[5] While Keynes had focused on the stability of a currency’s value, with panics based on an insufficient money supply leading to the use of an alternate currency and collapse of the monetary system, Friedman focused on price stability.
The result was summarised in a historical analysis of monetary policy, Monetary History of the United States 1867–1960, which Friedman coauthored with Anna Schwartz. The book attributed inflation to excess money supply generated by a central bank. It attributed deflationary spirals to the reverse effect of a failure of a central bank to support the money supply during a liquidity crunch.

Within mainstream economics, the rise of monetarism accelerated from Milton Friedman’s 1956 restatement of the quantity theory of money. Friedman argued that the demand for money could be described as depending on a small number of economic variables.
Thus, where the money supply expanded, people would not simply wish to hold the extra money in idle money balances; i.e., if they were in equilibrium before the increase, they were already holding money balances to suit their requirements, and thus after the increase they would have money balances surplus to their requirements. These excess money balances would therefore be spent and hence aggregate demand would rise. Similarly, if the money supply were reduced people would want to replenish their holdings of money by reducing their spending. In this, Friedman challenged a simplification attributed to Keynes suggesting that “money does not matter.” Thus the word ‘monetarist’ was coined.
The rise of the popularity of monetarism also picked up in political circles when Keynesian economics seemed unable to explain or cure the seemingly contradictory problems of rising unemployment and inflation in response to the collapse of the Bretton Woods system in 1972 and the oil shocks of 1973. On the one hand, higher unemployment seemed to call for Keynesian reflation, but on the other hand rising inflation seemed to call for Keynesian disinflation. The social-democratic post-war consensus that had prevailed in first world countries was thus called into question by the rising neoliberal political forces. In the late 1970s and early 1980s, after a decade of increasing influence, monetarism’s reputation began to decline for three main reasons. One was the growing belief, based on plausible interpretations of experience, that money demand is in practice highly “unstable,” shifting significantly and unpredictably from one quarter to the next. The second was the rise of RATIONAL EXPECTATIONS economics, which split analysts antagonistic to Keynesian activism into distinct camps. (A majority of monetarists themselves soon embraced the rational expectations hypothesis.) The third was the Federal Reserve’s famous “monetarist experiment” of 1979–1982. The latter episode warrants an extended discussion.
During the 1970s, inflation rose in the United States, as well as in many other industrial nations, to levels unprecedented on a multiyear basis during periods of relative peace. This occurred as a consequence of various “shocks”—oil price increases, the Vietnam War, and especially the 1971–1973 demise of the Bretton Woods system of fixed exchange rates (itself caused largely by the failure of the United States to maintain the gold value of the dollar). This demise left central bankers with a major new responsibility; namely, to provide a nominal anchor for national fiat currencies to replace the GOLD STANDARD. The Federal Reserve announced several times during the 1970s that it intended to bring inflation under control, but various attempts were unsuccessful. Then, on October 6, 1979, the Fed, under Paul Volcker’s chairmanship, announced and put into effect a new attempt involving drastically revised operating procedures that had some prominent features in common with monetarist recommendations. In particular, the Fed would try to hit specified monthly targets for the growth rate of M1, with operating procedures that emphasized control over a narrow and controllable monetary aggregate, nonborrowed reserves (i.e., bank reserves minus borrowings from the Fed). The M1 targets were intended to bring inflation down from double-digit levels to unspecified but much lower values.
In retrospect, the events that occurred from October 1979 to September 1982 are widely viewed as the crucial beginning of a necessary and successful attack on inflation that led, eventually, to the worldwide low-inflation environment of the 1990s. At the time, however, the “experiment” seemed anything but successful to many Americans. Short-term interest rates jumped dramatically in late 1979 under the tightened conditions, and 1980 witnessed a major fall in output in one quarter followed by a major jump in the next, due primarily to the imposition, and then removal, of credit controls. Finally, in 1981 and into the middle of 1982, a sustained period of monetary stringency brought about the deepest recession since the GREAT DEPRESSION of the 1930s and began to bring inflation down, more rapidly than many economists anticipated, toward acceptable values. What is left today of monetarism? While some disagreement remains, certain things are clear. Interestingly, most of the changes to Keynesian thinking that early monetarists proposed are accepted today as part of standard macro/monetary analysis. After all, the main proposed changes were to distinguish carefully between real and nominal variables, to distinguish between real and nominal interest rates, and to deny the existence of a long-run trade-off between inflation and unemployment. Also, most research economists today accept, at least tacitly, the proposition that monetary policy is more potent and useful than FISCAL POLICY for stabilizing the economy. There is some academic support, and a bit in central bank circles, for the real-business-cycle suggestion that monetary policy has no important effect on real variables, but this idea probably has marginal significance. It is hard to believe that the major recession of 1981–1983 in the United States was not caused largely by the Fed’s deliberate tightening of 1981—a tightening that shows up in ex-post real interest rates and in M1B growth rates as adjusted by the Fed at the time (Table 1, column 6) to take account of major institutional changes.
In 2005, most academic specialists in monetary economics would probably describe their orientation as NEW KEYNESIAN. Also, monetary aggregates currently play a small or nonexistent role in the monetary policy analysis of academic and central-bank economists. In terms of its underlying scientific rationale, however, today’s mainstream analysis is much closer to that of the monetarist than the Keynesian position of, for example, 1956–1978. In addition to the points noted above, current thinking clearly favors policy rules in contrast to “discretion,” however defined, and stresses the central importance of maintaining inflation at quite low rates. It is only in its emphasis on monetary aggregates that monetarism is not being widely espoused and practiced today.
REFERENCES:
1. Brunner, Karl, and Allan H. Meltzer. “An Aggregate Theory for a Closed Economy.” In Jerome L. Stein, ed., Monetarism. New York: American Elsevier, 1976.
2. Friedman, Milton. A Program for Monetary Stability. New York: Fordham University Press, 1959.
3. Friedman, Milton. “The Role of Monetary Policy.” American Economic Review 58 (March 1968): 1–17.

Monetarism is an economic theory that says the money supply is the most important driver of economic growth. As the money supply increases, people demand more. Factories produce more, creating new jobs. 
Monetarists warn that increasing the money supply only provides a temporary boost to economic growth and job creation. Over the long run, increasing the money supply increases inflation. As demand outstrips supply, prices will rise to match. 
Monetarists believe monetary policy is more effective than fiscal policy (government spending and tax policy). Stimulus spending adds to the money supply, but it creates a deficit adding to a country’s sovereign debt. That could increase interest rates.
Monetarists say that central banks are more powerful than the government because they control the money supply. They also tend to watch real interest rates rather than nominal rates. Most published rates are nominal rates, while real rates remove the effects of inflation. Real rates give a truer picture of the cost of money.
Monetarism has recently gone out of Favour. Money supply has become a less useful measure of liquidity than in the past.
However, the money supply does not measure other assets, such as stocks, commodities and home equity. People are more likely to save money by investing in the stock market because they receive a better return. 
That means the money supply does not measure these assets. If the stock market rises, people feel wealthy and are inclined to spend more. An increase in spending increases demands, which boosts the economy.
Stocks, commodities and home equity created economic booms that the Federal Reserve ignored. The Great Recession was fueled in part by the creation of a housing market bubble (home values rising, loans being approved for people who couldn’t afford them, and money being made by investors on the loans), which burst and took much of the economy with it.
How It Works 
When the money supply expands, it lowers interest rates. This is due to banks having more to lend, so they are willing to charge lower rates. That means consumers borrow more to buy items like houses, automobiles, and furniture. Decreasing the money supply raises interest rates, making loans more expensive—this slows economic growth.
In conclusion, monetarism is a macroeconomic school of thought that emphasizes:
1.long-run monetary neutrality, 2.short-run monetary non-neutrality,
3.the distinction between real and nominal interest rates , and
4.the role of monetary aggregates in policy analysis.

NAME: MBAH JULIET EZINNE
REG NO: 2019/241713
DEPT: EDUCATION AND ECONOMIC
COURSE: MACROECONOMICS ( 204)
TOPIC: DISCUSS MONETARIST MACROECONOMICS SYSTEM
What Is Monetarist Theory?
The monetarist theory is an economic concept that contends that changes in money supply are the most significant determinants of the rate of economic growth and the behavior of the business cycle. When monetarist theory works in practice, central banks, which control the levers of money. Monetarists are certain the money supply is what controls the economy, as their name implies. They believe that controlling the supply of money directly influences inflation and that by fighting inflation with the supply of money, they can influence interest rates in the future
Understanding Monetarist Theory
According to monetarist theory, if a nation’s supply of money increases, economic activity will increase—and vice versa.Monetarist theory is governed by a simple formula: MV = PQ, where M is the money supply, V is the velocity (number of times per year the average dollar is spent), P is the price of goods and services and Q is the quantity of goods and services. Assuming constant V, when M is increased, either P, Q, or both P and Q rise. General price levels tend to rise more than the production of goods and services when the economy is closer to full employment. When there is slack in the economy, Q will increase at a faster rate than P under monetarist theory.tary policy, can exert much power over economic growth rates
Monetarist Theory of Inflation
Monetarists argue that if the Money Supply rises faster than the rate of growth of national income, then there will be inflation.If the money supply increases in line with real output then there will be no inflation.
Quantity Theory of Money
Fischer Version MV=PT,
M = Money Supply
V= Velocity of circulation
P= Price Level and
T = Transactions.
T is difficult to measure so it is often substituted for Y = National Income
MV = PY where Y =national output
The above equation must hold the value of expenditure on goods and services must equal the value of output.
Explanation of why money supply leads to inflation
Monetarists believe that in the short-term velocity (V) is fixed This is because the rate at which money circulates is determined by institutional factors, e.g. how often workers are paid does not change very much. Milton Friedman admitted it might vary a little but not very much so it can be treated as fixed
Monetarists also believe output Y is fixed. They state it may vary in the short run but not in the long run (because LRAS is inelastic and determined by supply-side factors.) Therefore an increase in the Money Supply will lead to an increase in inflation
Reference
G. E. J. Dennis, Monetary Economics (Longman, 1981) chs 5, 6.
R. Tarling and F. Wilkinson, ‘Inflation and the Money Supply’, Cambridge Economic Policy Review, no. 3 (1977).
Rowan D.C. (1983) Monetarist Macroeconomics. In: Output, Inflation and Growth. Palgrave Macmillan, London

NAME: Omeje Philomena oluchukwu
DEPT: Social science Education (Economics)
REG NO: 2019/243750
COURSE: ECO 204
DISCUSS MONETARIST MACRO ECONOMIC SYSTEM
The monetarist theory (also referred to as “monetarism”) is a fundamental macroeconomic theory that focuses on the importance of the money supply as a key economic force. Milton Friedman popularized the theory of monetarism in his 1967 address to the American Economic Association.
Subscribers to the theory believe that money supply is a primary determinant of price levels and inflation . Increasing money supply, according to the theory, inevitably leads to higher prices and inflation, while decreasing the money supply leads to deflation and risks, causing a recession. Changes in the money supply also affect employment and production levels, but the monetarist theory asserts that those effects are only temporary, while the effect on inflation is more long lasting and significant.
MONETARISM: CORE BELIEFS
1. The primary cause of inflation is an excess supply of money: They believe that inflation is always a monetary phenomenon. The reason inflation exit is that there is too much money in supply
2. Contraction of the money supply can also be linked directly to Economic downturns: They also believe that if a nation, federal government, CBN contract money supply, it can cause Economic downturns, recessions.
3. Fluctuations in the quantity of money are the dominant cause of fluctuations in the price level, and it’s relationship to income: what cause this fluctuations as well as fluctuations in the relationship between the price labour and how much money one get is the fluctuations of money supply.
4. Manipulations of the money supply has a direct effect on the balance of payments and exchange rate.
6. Long-run monetary policy rules or at least pre stated “target” are required to foster long-run sustainable Economic growth.
QUANTITY THEORY OF MONEY
There is an underlying equation that forms the foundation of the monetarist theory. It is known as the “equation of exchange” (also referred to as the “quantity theory of money”). The quantity theory of money can be summarized in the equation of exchange , formulated by John Stuart Mill, which states that the money supply, multiplied by the rate at which money is spent per year, equals the nominal expenditures in the economy. Although the equation’s become quite complex due to its expansion and refinement by recent economists, the basic equation is expressed as follows:
MV =PQ
Where:
M is the money supply
V is the velocity of money (the rate of turnover at which a single unit of currency – e.g., one dollar – is spent in one year)
P is the average price level for transactions in the economy (the purchase of goods and services)
Q is the total quantity of goods and services produced – i.e., economic output or production.
A key point to note is that monetarists believe that changes to M (money supply) are the driver of the equation. In short, a change in M directly affects and determines employment, inflation (P), and production (Q). In the original version of the quantity theory of money, V is held to be constant, but this assumption was dropped by John Maynard Keynes and is not assumed by the monetarists, who instead believe that V is easily predictable. Economic growth is a function of economic activity (Q) and inflation (P). If V is constant (or at least predictable), then an increase (or decrease) in M will lead to an increase (or decrease) in either P or Q. An increase in P denotes that Q will remain constant, while an increase in Q means that P will be relatively constant. According to monetarism, variations in the money supply will affect price levels over the long term and economic output in the short term. A change in the money supply, therefore, will directly determine prices, production, and employment.

Criticisms of monetarism
1.The link between the money supply and inflation is often very weak in practice.
2. The velocity of circulation (V) is not stable but can vary significantly due to confidence, changes in the use of credit cards, decline in use of cash. e.t.c
3. Targeting arbitrary money supply targets can cause a severe recession and high unemployment. For example, UK targeted money supply growth in the early 1980s, but this caused the recession of 1981 with many economists arguing it was deeper than necessary.
Conclusion
Monetarism states that government can foster Economic stability by targeting the growth rate of money supply. It is a set of views based on the belief that the total amount of money in an Economy is the primary determinant of Economic growth.
Underlying the monetarist theory is the equation of exchange, which is expressed as MV = PQ. which states that the money supply, multiplied by the rate at which money is spent per year, equals the nominal expenditures in the economy. One monetarist policy conclusion is the rejection of fiscal policy in favour of a “monetary rule.
Despite their strong view on money supply as the core determinant of price levels and inflation, they are critize base on their views. Monetarism focuses on the macroeconomic effects of the supply of money and the role of central banking on an economic system.
Reference
Friedman, Milton(2008). Monetary History of the United States,1867-1960. Princeton University press.
Schwartz, Ann J, 1987. Money in Historical perspective, University of Chicago press
Friedman 1963. A monetary History of the United States. Princeton.

Name: NWADIKE VIVIAN MMESOMA
Economics department
REG NO: 2019/244657
TOPIC: MONETARISM SYSTEM

What is monetarism?

According to the Oxford dictionary monetarism is the theory or branch of controlling the supply of money as the chief method of stabilising the economy. Monetarism is a school of thought in monetary economics that emphasizes the role of government in controlling the amount of money in circulation. It is a macroeconomic theory which states that government can foster economics stability by targeting the growth rate of the money.
Monetarism system is a system by which a government provide money in a country’s economy. Modern monetary system usually consist of the national treasury, the mint of central banks and commercial Banks.
It is the set of mechanism used by a government to issue money in a particular economy. The process involves central banks and commercial Banks. In a monetary system there is a hierarchy of money which explains the monetary system.

Hierarchy of money.

We have money and credit. Money which means a means of settlement of debt. Credit means a delay of settlement of debt.
What happens if we start to include financial instrument in there, this shows a line between money and credit as it helps to explain the different types of monetary system.
There are different types of monetary system which are;

Commodity money system

Commodity-backed money system

Fiat money system.

Ultimately this different types of monetary system should be able to statisfy or carry out the functions of money, which are medium of exchange, portability, scarcity, store of value, unit of account.

Commodity money is very easy to understand because it is the simplest monetary system ever practiced. It is the use of commodity in exchange for another commodity, it is a basis physical asset, often used as raw material in production of goods. It should be interchangeable with another commodity of the same type.

Commodity backed money system, in commodity backed money vwe have representative money which is the bank notes, which is directly linked to the commodity because your note helps you to exchange it for any commodity e.g Gold.

Fiat money system, it is the hardest or slight complicated form of system in which the bank notes which can be exchange for Gold has no intrinsic value, it’s value is valid only if the government has declared it to be legal tender, i.e a medium of payment that must by law, be accepted as a valid method of paying financial obligations.

Money Supply

Monetarism has recently gone out of favor. Money supply has become a less useful measure of liquidity than in the past.

However, the money supply does not measure other assets, such as stocks, commodities and home equity. People are more likely to save money by investing in the stock market because they receive a better return.

That means the money supply does not measure these assets. If the stock market rises, people feel wealthy and are inclined to spend more. An increase in spending increases demands, which boosts the economy.

Stocks, commodities and home equity created economic booms that the Fed (the Federal Reserve) ignored. The Great Recession was fueled in part by the creation of a housing market bubble (home values rising, loans being approved for people who couldn’t afford them, and money being made by investors on the loans), which burst and took much of the economy with it.

How It Works

When the money supply expands, it lowers interest rates. This is due to banks having more to lend, so they are willing to charge lower rates. That means consumers borrow more to buy items like houses, automobiles, and furniture. Decreasing the money supply raises interest rates, making loans more expensive—this slows economic growth.

In the United States, the Federal Reserve manages the money supply with the Federal funds rate. This is a targeted rate the Fed sets for banks to charge each other for overnight loans, and it impacts all other interest rates. The Fed uses other monetary tools, such as open market operations, buying and selling government securities to reach the target federal funds rate.

The Fed reduces inflation by raising the federal funds rate or decreasing the money supply. This is known as contractionary monetary policy. However, the Fed must be careful not to tip the economy into recession. To avoid recession, and the resultant unemployment, the Fed must lower the fed funds rate and increase the money supply. This is known as expansionary monetary supply.

Milton Friedman Is the Father of Monetarism

Milton Friedman popularized the theory of monetarism in his 1967 address to the American Economic Association. He said that the antidote to inflation was higher interest rates, which in turn reduces the money supply. Prices then fall as people would have less money to spend.

Milton also warned against increasing the money supply too fast, which would be counter-productive by creating inflation. But a gradual increase is necessary to prevent higher unemployment rates.

The belief is that if the Fed were to properly manage the money supply and inflation.
It would theoretically create a Goldilocks economy, where low unemployment and an acceptable level of inflation are prevalent.

Friedman (and others) blamed the Fed for the Great Depression.8 As the value of the dollar fell, the Fed tightened the money supply when it should have loosened it. They raised interest rates to defend the value of the dollar as people redeemed their paper currency for gold. Money supply dwindled, and loans became harder to get. The recession then worsened into a depression.

Nebo Casmir Chukwuemeka
2019/244263
Economics
ECO 204
12/02/22

MONETARISM AND ITS TENETS.
Monetarism is an economic school of thought that stresses the primary importance of the money supply in determining nominal GDP and the price level. The “Founding Father” of Monetarism is economist Milton Friedman. Monetarism is a theoretical challenge to Keynesian economics that increased in importance and popularity in the late 1960s and 1970s. In fact, the tide was so strong that in 1979 the Federal Reserve switched its operating strategy more in line with Monetarist theory, though they subsequently abandoned the strategy in 1982 for a number of reasons.
The monetarist theory (also referred to as “monetarism”) is a fundamental macroeconomic theory that focuses on the importance of the money supply as a key economic force. Subscribers to the theory believe that money supply is a primary determinant of price levels and inflation.
Increasing money supply, according to the theory, inevitably leads to higher prices and inflation, while decreasing the money supply leads to deflation and risks, causing a recession.
Changes in the money supply also affect employment and production levels, but the monetarist theory asserts that those effects are only temporary, while the effect on inflation is more long-lasting and significant.
Although most economists today reject the slavish attention to money growth that is at the heart of monetarist analysis, some important tenets of monetarism have found their way into modern non monetarist analysis, muddying the distinction between monetarism and Keynesianism that seemed so clear three decades ago. Probably the most important is that inflation cannot continue indefinitely without increases in the money supply, and controlling it should be a primary, if not the only, responsibility of the central bank.­
When the money supply expands, it lowers interest rates. This is due to banks having more to lend, so they are willing to charge lower rates. That means consumers borrow more to buy items like houses, automobiles, and furniture. Decreasing the money supply raises interest rates, making loans more expensive—this slows economic growth.
There is an underlying equation that forms the foundation of the monetarist theory. It is known as the “equation of exchange” (also referred to as the “quantity theory of money”). Although the equation’s become quite complex due to its expansion and refinement by recent economists, the basic equation is expressed as follows:
M * V = P * Q
Where;
● M is the money supply
● V is the velocity of money (the rate of turnover at which a single unit of currency – e.g., one dollar – is spent in one year)
● P is the average price level for transactions in the economy (the purchase of goods and services)
● Q is the total quantity of goods and services produced – i.e., economic output or production

The quantity theory is the basis for several key tenets and prescriptions of monetarism:
1. Long-run monetary neutrality: Long-run neutrality of money is defined here to imply a long-run independence of real variables from the money supply. It is a consensus view that money is unlikely to be neutral in the short run because the sources of non neutrality (e.g. sticky prices) are more effective in the short run.
2. Short-run monetary non neutrality: An increase in the stock of money has temporary effects on the National Output and employment in the short run because wages and prices take time to align.
3. Constant money growth rule: Friedman, who died in 2006, proposed a fixed monetary rule, which states that the Fed should be required to target the growth rate of money to equal the growth rate of real GDP, leaving the price level unchanged. If the economy is expected to grow at 2 percent in a given year, the Fed should allow the money supply to
increase by 2 percent. The Fed should be bound to fixed rules in conducting monetary policy because discretionary power can destabilize the economy.
4. Interest rate flexibility: The money growth rule was intended to allow interest rates, which affect the cost of credit, to be flexible to enable borrowers and lenders to take account of expected inflation as well as the variations in real interest rates.

Name: Okeanyaego Victor Chidubem
Reg. No: 2019/244068
Department: Economics
Course Code: ECO 204
Date: February 12, 2022

Monetarist System and its Tenets.
Monetarism is an economic school of thought that posits that most economic fluctuations in the economy can be explained by the money supply. Monetarists also believe that government intervention in the economy should be minimal and is often counterproductive. Monetarism is a direct challenge to the Keynesian school of thought, which advocates aggressive fiscal intervention by a government to stimulate a declining economy, which itself was a challenge to the classical school of economics. Probably the most famous contemporary monetarist is economist Milton Friedman.
Monetarists believe that the supply of money is the most important factor that determines national income and growth. They base this proposition on the quantity theory of money. Harvard economist N. Gregory Mankiw explains that the quantity theory of money is ‘a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate.’
Most economists agree with the principle of monetary neutrality, which states that in the long run, changes in the money supply influence nominal economic variables but not real economic variables. Nominal variables are variables that are measured in terms of money, while real variables are measured in physical units. For example, just because nominal gross domestic product, or GDP (a measure of national output), rose by a certain amount of money, doesn’t mean that the economy increased its output of goods and services – the increase in nominal GDP may been caused entirely by rising prices rather than more goods and services being produced. Monetarists, however, argue that increasing or decreasing the supply of money in the short run can have significant effects on output and employment.
Monetarism has recently gone out of favor. Money supply has become a less useful measure of liquidity than in the past.
However, the money supply does not measure other assets, such as stocks, commodities and home equity. People are more likely to save money by investing in the stock market because they receive a better return.
That means the money supply does not measure these assets. If the stock market rises, people feel wealthy and are inclined to spend more. An increase in spending increases demands, which boosts the economy.
Stocks, commodities and home equity created economic booms that the Fed (the Federal Reserve) ignored. The Great Recession was fueled in part by the creation of a housing market bubble (home values rising, loans being approved for people who couldn’t afford them, and money being made by investors on the loans), which burst and took much of the economy with it.
Central to monetarism is the “quantity theory of money,” which monetarists adopted from earlier economic theories and integrated into the general Keynesian framework of macroeconomics. The quantity theory of money can be summarized in the equation of exchange, formulated by John Stuart Mill, which states that the money supply, multiplied by the rate at which money is spent per year, equals the nominal expenditures in the economy. The formula is given as:​
MV=PQ
where:
M=money supply
V=velocity (rate at which money changes hands)
P=average price of a good or service
Q=quantity of goods and services sold
​A key point to note is that monetarists believe that changes to M (money supply) are the driver of the equation. In short, a change in M directly affects and determines employment, inflation (P), and production (Q). In the original version of the quantity theory of money, V is held to be constant, but this assumption was dropped by John Maynard Keynes and is not assumed by the monetarists, who instead believe that V is easily predictable.
Economic growth is a function of economic activity (Q) and inflation (P). If V is constant (or at least predictable), then an increase (or decrease) in M will lead to an increase (or decrease) in either P or Q.
An increase in P denotes that Q will remain constant, while an increase in Q means that P will be relatively constant. According to monetarism, variations in the money supply will affect price levels over the long term and economic output in the short term. A change in the money supply, therefore, will directly determine prices, production, and employment.
The quantity theory is the basis for several key tenets and prescriptions of monetarism:
1. Long-run monetary neutrality: Long-run neutrality of money is defined here to imply a long-run independence of real variables from the money supply. It is a consensus view that money is unlikely to be neutral in the short run because the sources of non neutrality (e.g. sticky prices) are more effective in the short run.
2. Short-run monetary non neutrality: An increase in the stock of money has temporary effects on the National Output and employment in the short run because wages and prices take time to align.
3. Constant money growth rule: Friedman, who died in 2006, proposed a fixed monetary rule, which states that the Fed should be required to target the growth rate of money to equal the growth rate of real GDP, leaving the price level unchanged. If the economy is expected to grow at 2 percent in a given year, the Fed should allow the money supply to
increase by 2 percent. The Fed should be bound to fixed rules in conducting monetary policy because discretionary power can destabilize the economy.
4. Interest rate flexibility: The money growth rule was intended to allow interest rates, which affect the cost of credit, to be flexible to enable borrowers and lenders to take account of expected inflation as well as the variations in real interest rates.

Name: Anyanwor Chinenye Frances
Registration Number: 2019/244259
Department: Economics
Monetarist System and their Tenets:
Monetarism is closely associated with economist Milton Friedman, who argued, based on the quantity theory of money, that the government should keep the money supply fairly steady, expanding it slightly each year to allow for the natural growth of the economy. Due to the inflationary effects that can be brought about by the excessive expansion of the money supply, Friedman, who formulated the theory of monetarism, asserted that monetary policy should be done by targeting the growth rate of the money supply to maintain economic and price stability.
In his book, A Monetary History of the United States 1867–1960, Friedman proposed a fixed growth rate called the K-percent rule, suggesting that money supply should grow at a constant annual rate tied to the growth of nominal gross domestic product (GDP) and be expressed as a fixed percentage per year. This way, the money supply will be expected to grow moderately, businesses will be able to anticipate the changes to the money supply every year and plan accordingly, the economy will grow at a steady rate, and inflation will be kept at low levels.
In general, monetary policy can be characterized as contractionary or expansionary. Contractionary monetary policy is when the Fed reduces inflation by raising the federal funds rate or decreasing the money supply. Expansionary monetary policy works by expanding the money supply faster than usual or lowering short-term interest rates.
Milton Friedman popularized the theory of monetarism in his 1967 address to the American Economic Association. He said that the antidote to inflation was higher interest rates, which in turn reduces the money supply. Prices then fall as people would have less money to spend.
Milton also warned against increasing the money supply too fast, which would be counter-productive by creating inflation. But a gradual increase is necessary to prevent higher unemployment rates.

The belief is that if the Fed were to properly manage the money supply and inflation, it would theoretically create a Goldilocks economy, where low unemployment and an acceptable level of inflation are prevalent.
Friedman (and others) blamed the Fed for the Great Depression. As the value of the dollar fell, the Fed tightened the money supply when it should have loosened it. They raised interest rates to defend the value of the dollar as people redeemed their paper currency for gold. Money supply dwindled, and loans became harder to get. The recession then worsened into a depression.
Monetarists believe monetary policy is more effective than fiscal policy (government spending and tax policy). Stimulus spending adds to the money supply, but it creates a deficit adding to a country’s sovereign debt. That could increase interest rates.
Monetarists also believe that, as their name suggests, the money supply is what regulates the economy. They see that managing money inventory directly impacts swelling and that by limiting money inventory, they may reduce future financing expenses. Monetarists believe that because the velocity of money is steady, raising the money supply will raise prices and real GDP in the near run.
Central to monetarism is the “quantity theory of money,” which monetarists adopted from earlier economic theories and integrated into the general Keynesian framework of macroeconomics. The quantity theory of money can be summarized in the equation of exchange, formulated by John Stuart Mill, which states that the money supply, multiplied by the rate at which money is spent per year, equals the nominal expenditures in the economy. The formula is given as:​
MV = PQ
where:
M=money supply
V=velocity (rate at which money changes hands)
P=average price of a good or service
Q=quantity of goods and services sold
TENETS OF THE MONETARIST SYSTEM:
• Long-run monetary neutrality: An increase in the money stock would be followed by an increase in the general price level in the long run, with no effects on real factors such as consumption or output.­
• Short-run monetary non neutrality: An increase in the stock of money has temporary effects on real output (GDP) and employment in the short run because wages and prices take time to adjust (they are sticky, in economic parlance).­
• Constant money growth rule: Friedman, who died in 2006, proposed a fixed monetary rule, which states that the Fed should be required to target the growth rate of money to equal the growth rate of real GDP, leaving the price level unchanged. If the economy is expected to grow at 2 percent in a given year, the Fed should allow the money supply to increase by 2 percent. The Fed should be bound to fixed rules in conducting monetary policy because discretionary power can destabilize the economy.­
• Interest rate flexibility: The money growth rule was intended to allow interest rates, which affect the cost of credit, to be flexible to enable borrowers and lenders to take account of expected inflation as well as the variations in real interest rates.­

​


Name: Uche Miracle Chiamaka
Department: Economics
Reg No: 2019/241948
Course Code: Eco 204
MONETARIST MACROECONOMIC SYSTEM
Monetarism is an economic theory that says the money supply is the most important driver of economic growth. It is also a fundamental theory that emphasizes on money supply as a key economic force. An increase in money supply, leads to an increase in aggregate demand and vice versa. Believers of this theory believe that money supply is a primary determinant of price levels and inflation.
Clark Warburton in 1945 initially posited much of the monetarist theory immediately following World War II. However, Friedman Milton popularized the theory of monetarism in 1967 address to the American Economic Assosciate. He is the founding father of monetarism. In his 1967 address, he said that in order to reduce inflation there should be an increase in higher interest rates. This will reduce the money supply.Friedman wrote a book on monetarism titled “Monetary History of the United States, 1867-1960” which was co-authored by Anna Schwartz. In his book, he proposed a fixed growth rate called the K-percent rule. This rule suggest that money supply should grow at a constant annual rate tied to the growth of a nominal gross domestic product (GDP) and be expressed as a fixed percentage year. This will enable businesses to anticipate the changes to the money supply every year and plan accordingly. The economy will grow at a steady rate, and inflation will be at low levels.
Monetarist believers of the monetarism theory believe that an increase in money supply only provides a temporary boost to economic growth and creation of jobs. During the long run, an increase in money supply will lead to increase in inflation. Demand becomes more than supply thereby leading to an increase in price. Changes in money supply affects employment and production level. The monetarist asserts that those effects are temporary, while the effect on inflation is long lasting and significant.
Monetarist believe that the central banks are more powerful than the government because the control money supply in the economy. These central banks monitor real interest rates rather than nominal interest rates. However, most published rates are real interest rates which gives us better understanding of the economy. Real interest rates remove the effects of inflation in an economy.
The monetarist are not believers of the Keynesian theory. They are against the Keynesian theory. The monetarist believe monetary policy- expansionary or contractionary monetary policy is a more effective tool than fiscal policy ( government spending and taxation) for stimulating the economy or slowing down inflation but the Keynesian theory believe in the fiscal policy for controlling monetary supply. Monetarism is the primary alternative macroeconomic theory to Keynesian economic theory. Monetarists believe in extremely limited government economic intervention, while Keynesians argue for active government intervention
Increase in spending by individuals adds to money supply but it creates a deficit adding to a country’s foreign debt that could increase interest rates.
Milton warned against increasing the money supply so fast because it will lead to inflation. But a gradual increase prevents higher unemployment rates. Monetarist theory is an essential guide for central bank policies. However, Friedman was opposed to the whole idea of central banks, such as the Federal Reserve Bank in the United States of America. He blamed them for the Great Depression of the 1930s, arguing that the Fed(Federal Reserve) tightened the money supply at the very moment it should have been expanding it to stimulate economic growth. As the value of the dollar fell, the Fed tightened the money supply when it should be loosened. They raised interest rates to defend the value of dollar as people redeemed their paper currency for gold. Money supply wasn’t steady and loans became harder to get. The recession worsened into Depreciation. If the Fed were to properly manage the money supply and inflation, it will theoretically create a Goldilocks economy. A Goldilocks economy where there is low unemployment and acceptable level of inflation. In order for central banks to achieve the best monetary policy, they have to peg the money supply growth to match the rate of growth of real GDP. Friedman believes that free markets self-adjust in terms of prices and employment to provide the maximum benefit to the economy.
Money supply works this way in an economy. An increase in money supply, lowers interest rates. A decrease in money supply raises the interest rates, making loans more expensive thereby slowing down the economy. In the United States of America, the Federal Reserve manages the money supply with the Federal Funds rate(the interest rate at which banks can lend money overnight to other banks). Other banks uses this targeted rate to charge each other for overnight loans and this affects interest rates. Central banks also use monetary tools such as open market operation, buying and selling government securities to reach the targeted Federal funds rate.
Money supply has become a less useful measure of liquidity in the past. Money supply does not include other assets like stocks, commodities, and home equity. People invest their money in the stock market as they save because they will receive better return. If the stock market rises, people feel wealthy and are inclined to spend more. An increase in spending boosts the economy. Stocks, commodities and home equity created an economic boom that the Fed (Federal Reserve) ignored. Creation of a housing market bubble ( home values rising, loans being approved for people who couldn’t afford them, and money being made by investors on the loan) also led to the Great Economic Recession. In 1979, Jimmy Carter appointed Paul Volcker as chief of the Federal Reserve, who in turn utilized the monetarist perspective to controlling inflation. There us an underlying equation that forms the foundation of the monetarist theory. It is known as the equation of exchange also called the quantity theory of money
MV=PQ where
M=money supply
V=velocity of money
P= average price level.
Q=quantity of goods and services produced.
The Austrian School of Economic Thought perceives monetarism as somewhat narrow-minded, not taking into account the subjectivity involved in valuing capita.
Other criticisms revolve around international investment, trade liberalization, and central bank policy. This can be summarized as the effects of globalization, and the interdependence of markets (and consequently currencies). To manipulate money supply there will inherently be effects on other currencies as a result of relativity. This is particularly important in regards to the U.S. currency, which is considered a standard in international markets. Controlling supply and altering value may have effects on a variety of internal economic variables, but it will also have unintended consequences on external variables.
References
https://www.thebalance.com/monetarism-and-how-it-works-3305866
https://courses.lumenlearning.com/boundless-economics/chapter/major-theories-in-macroeconomics/
https://www.econlib.org/library/Enc/Monetarism.html
https://www.investopedia.com/terms/m/monetarism.asp

University of Nigeria Nsukka
Faculty of Education
Department of social science
( Economics Education)

TOPIC:
Understanding monetarism and the monestarist system

By:

EZEOHA NNENNA MERCY

2019/249099

February 13, 2022

What Is Monetarism?
Monetarism is a macroeconomic theory which states that governments can foster economic stability by targeting the growth rate of the money supply. Essentially, it is a set of views based on the belief that the total amount of money in an economy is the primary determinant of economic growth.
KEY TAKEAWAYS
Monetarism is a macroeconomic theory stating that governments can foster economic stability by targeting the growth rate of the money supply.
Central to monetarism is the quantity theory of money, which states that the money supply (M) multiplied by the rate at which money is spent per year (V) equals the nominal expenditures (P * Q) in the economy.
Monetarism is closely associated with economist Milton Friedman, who argued that the government should keep the money supply fairly steady, expanding it slightly each year mainly to allow for the natural growth of the economy.
Monetarism is a branch of Keynesian economics that emphasizes the use of monetary policy over fiscal policy to manage aggregate demand, contrary to most Keynesians.
Although most modern economists reject the emphasis on money growth that monetarists purported in the past, some core tenets of the theory have become a mainstay in nonmonetarist analysis
Understanding Monetarism
Monetarism is an economic school of thought which states that the supply of money in an economy is the primary driver of economic growth. As the availability of money in the system increases, aggregate demand for goods and services goes up. An increase in aggregate demand encourages job creation, which reduces the rate of unemployment and stimulates economic growth.
Monetary policy, an economic tool used in monetarism, is implemented to adjust interest rates that, in turn, control the money supply. When interest rates are increased, people have more of an incentive to save than to spend, thereby reducing or contracting the money supply. Contrarily, when interest rates are lowered following an expansionary monetary scheme, the cost of borrowing decreases, which means people can borrow more and spend more, thereby stimulating the economy.
Milton Friedman and Monetarism
Monetarism is closely associated with economist Milton Friedman, who argued, based on the quantity theory of money, that the government should keep the money supply fairly steady, expanding it slightly each year to allow for the natural growth of the economy. Due to the inflationary effects that can be brought about by the excessive expansion of the money supply, Friedman, who formulated the theory of monetarism, asserted that monetary policy should be done by targeting the growth rate of the money supply to maintain economic and price stability.
In his book, A Monetary History of the United States 1867–1960, Friedman proposed a fixed growth rate called the K-percent rule, suggesting that money supply should grow at a constant annual rate tied to the growth of nominal gross domestic product (GDP) and be expressed as a fixed percentage per year. This way, the money supply will be expected to grow moderately, businesses will be able to anticipate the changes to the money supply every year and plan accordingly, the economy will grow at a steady rate, and inflation will be kept at low levels.
The Quantity Theory of Money
Central to monetarism is the “quantity theory of money,” which monetarists adopted from earlier economic theories and integrated into the general Keynesian framework of macroeconomics. The quantity theory of money can be summarized in the equation of exchange, formulated by John Stuart Mill, which states that the money supply, multiplied by the rate at which money is spent per year, equals the nominal expenditures in the economy. The formula is given as:
MV=PQ
where:
M=money supply
V=velocity (rate at which money changes hands)
P=average price of a good or service
Q=quantity of goods and services sold
A key point to note is that monetarists believe that changes to M (money supply) are the driver of the equation. In short, a change in M directly affects and determines employment, inflation (P), and production (Q). In the original version of the quantity theory of money, V is held to be constant, but this assumption was dropped by John Maynard Keynes and is not assumed by the monetarists, who instead believe that V is easily predictable.
Economic growth is a function of economic activity (Q) and inflation (P). If V is constant (or at least predictable), then an increase (or decrease) in M will lead to an increase (or decrease) in either P or Q.
An increase in P denotes that Q will remain constant, while an increase in Q means that P will be relatively constant. According to monetarism, variations in the money supply will affect price levels over the long term and economic output in the short term. A change in the money supply, therefore, will directly determine prices, production, and employment.
Monetarism vs. Keynesian Economics
The view that velocity is constant is a source of contention among Keynesians, who believe that velocity should not be constant since the economy is volatile and subject to periodic instability. Instead, Keynes’ liquidity preference theory emphasizes how changes in money demand (and thus velocity) influence the price level and aggregate demand.
Monetarism builds on the Keynesian theory by assuming the same macroeconomic framework and integrating the equation of exchange (with V swinging cyclically, as Keynes argued), but instead focuses on the role played by money supply. Because they believe that V can be relatively easily predicted, monetarists argue that the equation of exchange could be resuscitated as an approach to stabilization policy, and they favor the use of monetary policy to do so.
Proponents of monetarism generally believe that controlling an economy through fiscal policy is a poor decision because it necessarily introduces microeconomic distortions that reduce economic efficiency. They prefer monetary policy as a tool to manage aggregate demand in a way that will be more neutral from a microeconomics standpoint and that avoids the deadweight losses and social costs that fiscal policy creates in markets.
History of Monetarism
Monetarism gained prominence in the 1970s, a decade characterized by high and rising inflation and slow economic growth. The policies of monetarism were responsible for bringing down inflation in the United States and the United Kingdom. After U.S. inflation peaked at 20% in 1979, the Fed switched its operating strategy to reflect monetarist theory. During this time period, economists, governments, and investors eagerly jumped at every new money supply statistic.
In general, monetary policy can be characterized as contractionary or expansionary. Contractionary monetary policy is when the Fed reduces inflation by raising the federal funds rate or decreasing the money supply. Expansionary monetary policy works by expanding the money supply faster than usual or lowering short-term interest rates.
In the years that followed, however, monetarism fell out of favor with many economists, as the link between different measures of money supply and inflation proved to be less clear than most monetarist theories had suggested. In addition, monetarism’s ability to explain the U.S. economy waned in the following decades. Many central banks today have stopped setting monetary targets and instead have adopted strict inflation targets.
Although most modern economists reject the emphasis on money growth that monetarists purported in the past, some core tenets of the theory have become a mainstay in nonmonetarist analysis. One of the most important of these ideas is that inflation cannot continue indefinitely without increases in the money supply. In addition, it is the responsibility (although not the primary goal) of the central bank to control inflation.
That being said, monetarist interpretations of past economic events are still relevant today. Ben Bernanke, former Fed Chairman, cited the work of Friedman in his decision to lower interest rates and increase the U.S. money supply in order to boost the economy during the global recession that began in 2007 in the United States.1
Real-World Examples of Monetarism
In Friedman’s seminal work, A Monetary History of the United States, 1867–1960, which he wrote with fellow economist Anna Schwartz, the two economists argued that failed monetary policy executed by the Federal Reserve was responsible for the Great Depression in the U.S. in the 1930s. In the view of Friedman and Schwartz, the Fed failed to relieve downward pressure on the money supply, and their eventual actions to reduce the money supply were the opposite of what they should have done. According to Friedman and Schwartz, markets tend towards a stable center; markets will behave erratically if the money supply is not properly set.
In 1979, when Paul Volcker became the Chairman of the Federal Reserve, he made combatting inflation the primary goal of the central bank. In keeping with Friedman and Schwartz’s recommendations, Volcker restricted the money supply in order to do this. He raised the federal funds rate to 20% in 1980. At this time, this strategy for fighting stagflation (high inflation combined with high unemployment and stagnant demand) was successful. Volcker’s policies drastically reduced the money supply, consumers stopped purchasing as much, and businesses stopped raising prices. However, while this caused inflation to greatly decline, it resulted in a big recession (the 1980-82 recession).
During the same time period, Britain was also struggling with severe inflation. When Margaret Thatcher was elected prime minister in 1979, she also implemented a set of monetarist policies to combat the rising prices in the country. By 1983, inflation in Britain had been halved, from 10% to 5%.
However, the popularity of monetarism was relatively brief. In the 1980s and 1990s, the link between the money supply and nominal GDP broke down; the quantity theory of money—the backbone of monetarism—was called into question and many economists who had recommended the policies of monetarism in the 1970s abandoned the approach.
Monetary Theory Definition
Monetary theory is a set of ideas about how changes in the money supply impact levels of economic activity.
Quantity Theory of Money Definition
The quantity theory of money is a theory that variations in price relate to variations in the money supply. more
What Is a Monetarist?
A monetarist is someone who believes an economy should be controlled predominantly by the supply of money.

Equation of Exchange Definition

The equation of exchange is a model that shows the relationship between money supply, price level, and other elements of the economy.
What is monetarist?
Its emphasis on money’s importance gained sway in the 1970s
Just how important is money? Few would deny that it plays a key role in the economy.­
But one school of economic thought, called monetarism, maintains that the money supply (the total amount of money in an economy) is the chief determinant of current dollar GDP in the short run and the price level over longer periods. Monetary policy, one of the tools governments have to affect the overall performance of the economy, uses instruments such as interest rates to adjust the amount of money in the economy. Monetarists believe that the objectives of monetary policy are best met by targeting the growth rate of the money supply. Monetarism gained prominence in the 1970s—bringing down inflation in the United States and United Kingdom—and greatly influenced the U.S. central bank’s decision to stimulate the economy during the global recession.
monetarism is mainly associated with Nobel Prize–winning economist Milton Friedman. In his seminal work A Monetary History of the United States, 1867–1960, which he wrote with fellow economist Anna Schwartz in 1963, Friedman argued that poor monetary policy by the U.S. central bank, the Federal Reserve, was the primary cause of the Great Depression in the United States in the 1930s. In their view, the failure of the Fed (as it is usually called) to offset forces that were putting downward pressure on the money supply and its actions to reduce the stock of money were the opposite of what should have been done. They also argued that because markets naturally move toward a stable center, an incorrectly set money supply caused markets to behave erratically.­
Monetarism gained prominence in the 1970s. In 1979, with U.S. inflation peaking at 20 percent, the Fed switched its operating strategy to reflect monetarist theory. But monetarism faded in the following decades as its ability to explain the U.S. economy seemed to wane. Nevertheless, some of the insights monetarists brought to economic analysis have been adopted by nonmonetarist economists.
The foundation of monetarism is the Quantity Theory of Money. The theory is an accounting identity—that is, it must be true. It says that the money supply multiplied by velocity (the rate at which money changes hands) equals nominal expenditures in the economy (the number of goods and services sold multiplied by the average price paid for them). As an accounting identity, this equation is uncontroversial. What is controversial is velocity. Monetarist theory views velocity as generally stable, which implies that nominal income is largely a function of the money supply. Variations in nominal income reflect changes in real economic activity (the number of goods and services sold) and inflation (the average price paid for them).
The quantity theory is the basis for several key tenets and prescriptions of monetarism:
• Long-run monetary neutrality: An increase in the money stock would be followed by an increase in the general price level in the long run, with no effects on real factors such as consumption or output.­
• Short-run monetary nonneutrality: An increase in the stock of money has temporary effects on real output (GDP) and employment in the short run because wages and prices take time to adjust (they are sticky, in economic parlance).­
• Constant money growth rule: Friedman, who died in 2006, proposed a fixed monetary rule, which states that the Fed should be required to target the growth rate of money to equal the growth rate of real GDP, leaving the price level unchanged. If the economy is expected to grow at 2 percent in a given year, the Fed should allow the money supply to increase by 2 percent. The Fed should be bound to fixed rules in conducting monetary policy because discretionary power can destabilize the economy.­
• Interest rate flexibility: The money growth rule was intended to allow interest rates, which affect the cost of credit, to be flexible to enable borrowers and lenders to take account of expected inflation as well as the variations in real interest rates.­
Many monetarists also believe that markets are inherently stable in the absence of major unexpected fluctuations in the money supply. They also assert that government intervention can often destabilize the economy more than help it. Monetarists also believe that there is no long-run trade-off between inflation and unemployment because the economy settles at long-run equilibrium at a full employment.
Although monetarism gained in importance in the 1970s, it was critiqued by the school of thought that it sought to supplant—Keynesianism. Keynesians, who took their inspiration from the great British economist John Maynard Keynes, believe that demand for goods and services is the key to economic output. They contend that monetarism falters as an adequate explanation of the economy because velocity is inherently unstable and attach little or no significance to the quantity theory of money and the monetarist call for rules. Because the economy is subject to deep swings and periodic instability, it is dangerous to make the Fed slave to a preordained money target, they believe—the Fed should have some leeway or “discretion” in conducting policy. Keynesians also do not believe that markets adjust to disruptions and quickly return to a full employment level of output.­
Keynesianism held sway for the first quarter century after World War II. But the monetarist challenge to the traditional Keynesian theory strengthened during the 1970s, a decade characterized by high and rising inflation and slow economic growth. Keynesian theory had no appropriate policy responses, while Friedman and other monetarists argued convincingly that the high rates of inflation were due to rapid increases in the money supply, making control of the money supply the key to good policy.­
The Fed restricted the money supply (in accordance with the Friedman rule) to tame inflation and succeeded. Inflation subsided dramatically, although at the cost of a big recession.­
Monetarism had another triumph in Britain. When Margaret Thatcher was elected prime minister in 1979, Britain had endured several years of severe inflation. Thatcher implemented monetarism as the weapon against rising prices, and succeeded in halving inflation.
But monetarism’s ascendance was brief. The money supply is useful as a policy target only if the relationship between money and nominal GDP, and therefore inflation, is stable and predictable. That is, if the supply of money rises, so does nominal GDP, and vice versa. To achieve that direct effect, though, the velocity of money must be predictable.­
In the 1970s velocity increased at a fairly constant rate and it appeared that the quantity theory of money was a good one (see chart). The rate of growth of money, adjusted for a predictable level of velocity, determined nominal GDP. But in the 1980s and 1990s velocity became highly unstable with unpredictable periods of increases and declines. The link between the money supply and nominal GDP broke down, and the usefulness of the quantity theory of money came into question. Many economists who had been convinced by monetarism in the 1970s abandoned the approach.
Most economists think the change in velocity’s predictability was primarily the result of changes in banking rules and other financial innovations. In the 1980s banks were allowed to offer interest-earning checking accounts, eroding some of the distinction between checking and savings accounts. Moreover, many people found that money markets, mutual funds, and other assets were better alternatives to traditional bank deposits. As a result, the relationship between money and economic performance changed.
The monetarist interpretation of the Great Depression was not entirely forgotten. In a speech during a celebration of Milton Friedman’s 90th birthday in late 2002, then-Fed governor Ben S. Bernanke, who would become chairman four years later, said, “I would like to say to Milton and Anna [Schwartz]: Regarding the Great Depression, you’re right. We [the Fed] did it. We’re very sorry. But thanks to you, we won’t do it again.”
Fed Bernanke mentioned the work of Friedman and Schwartz in his decision to lower interest rates and increase money supply to stimulate the economy during the global recession that began in 2007 in the United States. Prominent monetarists (including Schwartz) argued that the Fed stimulus would lead to extremely high inflation. Instead, velocity dropped sharply and deflation is seen as a much more serious risk.­

Although most economists today reject the slavish attention to money growth that is at the heart of monetarist analysis, some important tenets of monetarism have found their way into modern nonmonetarist analysis, muddying the distinction between monetarism and Keynesianism that seemed so clear three decades ago. Probably the most important is that inflation cannot continue indefinitely without increases in the money supply, and controlling it should be a primary, if not the only, responsibility of the central bank.­

REFERENCE
R. Taring and F . Wikinson, inflation and the money supply.
Inflation and growth palgrave MacMillan.
Rowan D. C (1983) monestarist macroeconomics
G. E. J . Dennis, monetary Economics

UGWU KAOSISOCHUKWU IMMACULETA
2019/241226
ECONOMICS DEPARTMENT

Monetarist school of thought is one of the mainstream macroeconomic thought. It believes that money supply is the primary determinant of economic growth. Those who hold this view we call monetarists or monetary economists. Monetarist system is closely associated with economist Milton Friedman, who argued that the government should keep the money supply fairly steady, expanding it slightly each year mainly to allow for the natural growth of the economy. As the availability of money in the system increases, aggregate demand for goods and services goes up. An increase in aggregate demand encourages job creation, which reduces the rate of unemployment and stimulates economic growth.
This system is a theoretical challenge to Keynesian economics that increased in importance and popularity in the late 1960s and 1970s. In fact, the tide was so strong that in 1979 the Federal Reserve switched its operating strategy more in line with Monetarist theory, though they subsequently abandoned the strategy in 1982 for a number of reasons.
The challenge to the traditional Keynesian theory strengthened during the years of stagflation following the 1973 and 1979 oil shocks. Keynesian theory had no appropriate policy responses to the supply shocks. Inflation was high and rising through the 1970s and Friedman argued convincingly that the high rates of inflation were due to rapid increases in the money supply. He argued that the economy may be complicated, but stabilization policy does not have to be. The key to good policy was to control the supply of money. The most important ideas and policy implications are;
1. The theoretical foundation is the Quantity Theory of Money.
2. The economy is inherently stable. Markets work well when left to themselves. Government intervention can often times destabilize things more than they help. Laissez faire is often the best advice.
3. The Fed should be bound to fixed rules in conducting monetary policy. They should not have discretion in conducting policy because they could make the economy worse off.
4. Fiscal Policy is often bad policy. A small role for government is good.

The building block for monetarist theory states that
M × V = P × T
where M is the quantity of M1, V is velocity of M1, or the average number of times that the currency turns over in a given year on the purchase of final goods and services, P is the price level, and T is real output or total volume of goods transacted. where it implies that velocity is fixed in the short run. By making this simple assumption, we have transformed the equation of exchange into the Quantity Theory of Money.
In the income version, the equation changes to
M × W = P°× Y
Where W is income velocity of money, Y is the real national income or product and P° is the GNP deflator. Because monetarists believe that markets are stable and work well, they believe that the economy is always near or quickly approaching full employment. Even if the economy is not at full employment, the danger of GDP deviating substantially from its potential level is small. So in the long-run, the economy will be at YP.
In the long run, changes in the money supply only cause inflation. This conclusion explains Friedman’s famous quote “Inflation is always and everywhere a monetary phenomenon.” Another implication is that the rate of growth of the money supply will equal the rate of growth of the price level (or inflation) in the long-run. If the money supply grows by five percent per year, the inflation rate will be about five percent per year. The apparent failure of low interest rates to revive the economy during the Great Depression, however, was taken as evidence that monetary policy is less potent than fiscal policy. The 1950s witnessed the development of new theories about the impact of monetary policy, with the dominant view being that policy is effective through its influence on both the cost and availability of credit. Still, even in the 1960s, the mainstream view was that monetary policy, though capable of having some impact, was less powerful than fiscal policy. Monetarists, by contrast, argued that changes in the quantity of money exert a powerful influence on economic activity. Friedman’s work during the 1950s helped establish the foundation for later studies of the link between monetary policy and the economy.

Conclusion
The core of the Quantity Theory is that, in the long run, inflation reflects excessive growth of the money stock relative to real output growth, the latter determined fundamentally by non-monetary forces such as population growth and productivity. Monetarists concluded that central bank attempts to manipulate interest rates had led to destabilizing fluctuations in money supply growth and, therefore, in economic activity. Hence, monetarists argued that monetary policymakers should minimize the variation of the growth rate of the money stock both in the shortrun and over time. Lags in assessing economic conditions and in the effects of policy actions on economic activity, they argued, made attempts at “fine tuning” a balance between inflation and unemployment futile. Instead, monetarists argued for a policy that maintained growth of the money stock at a low, fixed rate, irrespective of the business cycle.

Reference
https://www.investopedia.com/terms/m/monetarism.asp#:~:text=Monetarism%20is%20a%20macroeconomic%20theory,primary%20determinant%20of%20economic%20growth. Monetarism By OSIKHOTSALI MOMOH Updated July 25, 2021.

http://www.econweb.com/MacroWelcome/monetarism/notes.html Chapter Seventeen: Lecture Notes — Monetarism.

The Rise and Fall of a Policy Rule: Monetarism at the St. Louis Fed, 1968-1986 R. W. Hafer and David C. Wheelock.

Economics education
2019/249884
As popularized by Milton Friedman, asserts that money supply is the primary factor in determining inflation/deflation in an economy. According to the theory, monetary policy is a much more effective tool than the fiscal policy for stimulating the economy or slowing down the rate of inflation.
Monetarism is the primary alternative macroeconomic theory to Keynesian economic theory; monetarists believe in extremely limited government economic intervention. This theory focuses on the macroeconomic effects of the supply of money and central banking.
Monetarist theory views velocity as generally stable, which implies that nominal income is largely a function of the money supply. Variations in nominal income reflect changes in real economic activity (the number of goods and services sold) and inflation (the average price paid for them).

Reference
L.C. Anderson and K. Carlson (1970) “A Monetarist Model for Economic Stabilization”, Federal Reserve Bank of St Louis Review, Vol. 5