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

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.[1] Monetarism is commonly associated with neoliberalism.[2]

CPI 1914-2022
Inflation
Deflation
M2 money supply increases Year/Year
Monetarism today is mainly associated with the work of Milton Friedman, who was among the generation of economists to reject Keynesian economics and 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”.[3]

Though he opposed the existence of the Federal Reserve,[4] 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.

Description
Edit
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.[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.[6]

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.[7][unreliable source?][8] 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.

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
Monetary system is the assets which make up a country’s MONEY SUPPLY and the institutions involved in deposit-taking, money transmission and the provision of credit facilities, together constitute the monetary side of the ECONOMY.
The money supply consists of a number of assets (banknotes, coins etc.), denominated in terms of MONETARY UNITS (pounds and pence in the case of the UK). The institutions involved in handling money include various BANKS, FINANCE HOUSES, BUILDING SOCIETIES etc. The monetary system of a country is controlled by its CENTRAL BANK which uses a number of techniques to regulate the supply of money and interest rates

NAME: ONYISHI RITA IFEBUCHE
DEPARTMENT: EDUCATIONAL FOUNDATIONS
UNIT: SPECIAL EDUCATION/ECONOMICS
REG: 2018/243757
COURSE CODE: ECO 204
ASSIGNMENT

QUESTION; UNDERSTANDING MONETARISM AND MONETARIST SYSTEM.
ANSWER: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. 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.The monetarist theory draws its roots from two almost diametrically opposed ideas: the hard money policies which dominated monetary theory in the late nineteenth century, and the theories of economist John Maynard Keynes, who proposed a demand-driven model for determining the national money supply which would later prove the basis of macroeconomics. Keynes, who theorized economic panic to stem from an insufficient national money supply leading the nation toward an alternate currency followed by eventual economic collapse, focused his theories on the value of currency stability to maintain national economic health. Milton Friedman, in contrast, focused on price stability to ensure economic health and sought a stable equilibrium between the supply of and the demand for money to bring about such well-being.Many monetarists resurrected the former view that market economies prove inherently stable in the absence of major unexpected fluctuations in the money supply. This belief in the stability of free-market economies also asserted that active demand management, in particular fiscal policy, is unnecessary and in fact likely to be economically harmful. The basis of this argument centered around an equilibrium formed between “stimulus” fiscal spending and future interest rates. In effect, Friedman’s model argued that current fiscal spending creates as much of a drag on the economy by increasing interest rates as it does to create consumption. According to monetarists, fiscal policy was shown to have no real effect on total demand, but merely shifted demand from the investment sector to the consumer sector.

Adigwe Chibuikem Anthony
2019/245463

Monetarism, a term first used by Brunner in 1968, can be understood in two ways. The first relates to the economic thought that sees in the quantity of money the major source of economic activity and its disruptions (especially inflation), as well as believing that targeting the growth of money supply is the best monetary policy. Secondly, it refers to a large group of economists adherent to these thoughts, lead by Milton Friedman and the Chicago School of economics.
This paradigm, which gained popularity in the 1960s, relates closely to neoclassical economics, believing that free flow of credit and interest rates, as well as a laissez faire attitude is the best way to go, since limited public intervention and a competitive economic system will grant better results than those resulting from Keynesian economics. However, since monetarists consider monetary policy more effective, government control over money supply is required. Also, since monetarists believed in the importance of the quantity of money, the equation of exchange regained popularity.
Monetarists view fiscal policy less effective than monetary policy because of the low interest elasticity of money demand. Therefore, when using the IS-LM model, monetarists consider the IS curve more elastic than the one used by Keynesians, and a LM curve more inelastic. This is the reason why, when using the monetarist’ IS-LM model, public investment created by fiscal policy creates a crowding out effect over private investment, reducing the effectiveness of public spending. However, even though monetary policy is more reliable, its effects may take a while to be noted in the economy, and therefore its implementation can be difficult.
Concerning the Phillips curve, monetarists criticise the money illusion implied in it, which is the basis for the relationship between inflation and unemployment. They believe that, given an unanticipated higher inflation and the subsequent decrease in unemployment, the trade-off shown in the Phillips curve will hold. However this will not be the case when monetary policies are anticipated, implying that the trade-off between inflation and unemployment does not apply in the long run. This is a clear example of the learning process introduced in the Adaptive Expectations hypothesis, firstly formulated (though not under its widely known name) by Irving Fisher in his article “The Purchasing Power of Money”, 1911, and popularized by Phillip Cagan in 1956 and by Friedman, in his paper “The Role of Monetary Policy”, 1968, where he also introduced the concept of natural rate of unemployment, which is the rate that the economy will reach after each movement along the Phillips curve. It must be highlighted that, contrary to New Classical Macroeconomics studies and its Rational expectations hypothesis, monetarists believe that the trade off can be systematically exploited in the short run, as long as each policy is unanticipated.
Given the low effectiveness of fiscal policy as well as the risks of high inflation caused by systematic monetary policies, monetarists defend a commitment by the monetary authorities to steady monetary growth, and reject discretionary and politically driven monetary policies, because of the uncertainty they create.

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 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. As the money supply increases, people demand more. Factories produce more, creating new jobs

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.

MBADIWE KELECHI EMMANUEL
2019/250965
Economics

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.

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.

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.

NAME: UGWUOKE KOSISOCHUWU PRECIOUS
REG NO: 2019/243547

MONETARIST MACRO ECONOMIC SYSTEM
Who Is a Monetarist?
A monetarist is an economist who holds the strong belief that money supply including physical currency, deposits, and credits is the primary factor affecting demand in an economy. 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. Monetarists are economists and policymakers who subscribe to the theory of monetarism. Famous monetarists include Milton Friedman, Alan Greenspan, and Margaret Thatcher.

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.
MONETARISM
What is Monetarism?
Monetarism is a school of thought in monetary economics that emphasizes the role of governments in controlling the amount of money in circulation. 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. Today, 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 non-monetarist economists.
At its most basics
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 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.¬ 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

THE GREAT DEBATE
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.

In 1979, Paul A. Volcker became chairman of the Fed and made fighting inflation its primary objective. 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, to less than 5 percent by 1983 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 upmost 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. predictable 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.

monetarism or total amount of money in an economy in the form of coin, currency, and bank deposits, is the main driver of short-term economic activity, according to the monetarism school of economic theory. The most prominent proponent of monetarism is typically considered as American economist Milton Friedman. Friedman and other monetarists promote macroeconomic theories and practices that significantly depart from those of the Keynesian school, which once held sway. During the 1970s and the beginning of the 1980s, the monetarist approach gained popularity.Underlying the monetarist theory is the equation of exchange, which is expressed as MV = PQ. Here M is the supply of money, and V is the velocity of turnover of money (i.e., the number of times per year that the average dollar in the money supply is spent for goods and services), while P is the average price level at which each of the goods and services is sold, and Q represents the quantity of goods and services produced.

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.” In A Monetary History of the United States 1867–1960 (1963), Friedman, in collaboration with Anna J. Schwartz, presented a thorough analysis of the U.S. money supply from the end of the Civil War to 1960. This detailed work influenced other economists to take monetarism seriously.
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.

Related Topics: economics quantity theory of money money supply equation of exchange
Underlying the monetarist theory is the equation of exchange, which is expressed as MV = PQ. Here M is the supply of money, and V is the velocity of turnover of money (i.e., the number of times per year that the average dollar in the money supply is spent for goods and services), while P is the average price level at which each of the goods and services is sold, and Q represents the quantity of goods and services produced.

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.” In A Monetary History of the United States 1867–1960 (1963), Friedman, in collaboration with Anna J. Schwartz, presented a thorough analysis of the U.S. money supply from the end of the Civil War to 1960. This detailed work influenced other economists to take monetarism seriously.

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, 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.

Key People: Margaret Thatcher
Related Topics: economics quantity theory of money money supply equation of exchange
Underlying the monetarist theory is the equation of exchange, which is expressed as MV = PQ. Here M is the supply of money, and V is the velocity of turnover of money (i.e., the number of times per year that the average dollar in the money supply is spent for goods and services), while P is the average price level at which each of the goods and services is sold, and Q represents the quantity of goods and services produced.

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.” In A Monetary History of the United States 1867–1960 (1963), Friedman, in collaboration with Anna J. Schwartz, presented a thorough analysis of the U.S. money supply from the end of the Civil War to 1960. This detailed work influenced other economists to take monetarism seriously.

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.
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.

Akaenweokwu Anthony Nnamdi
2015/202682
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.

NAME: OKAFORUKWU CHIZARAM SANDRA
REG;2017/249551
DEPARTMENT :ECONOMICS

WHAT IS MONETARISM?
Monetarism is a macroeconomic theory that holds that governments can promote economic stability by focusing on the rate of growth of the money supply. It is essentially a set of beliefs that the total amount of money in an economy is the primary determinant of economic growth.
Monetarism is a school of thought in economics that holds that the supply of money in an economy is the primary driver of economic growth. As money becomes more available in the system, so does aggregate demand for goods and services. An increase in aggregate demand promotes job creation, which lowers the unemployment rate and stimulates economic growth.Monetary policy, a monetarist economic tool, is used to adjust interest rates, which in turn control the money supply. When interest rates rise, people have more incentive to save rather than spend, reducing or contracting the money supply. When interest rates are lowered as part of an expansionary monetary scheme, the cost of borrowing falls, allowing people to 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 relatively stable, expanding it slightly each year to allow for the economy’s natural growth. Due to the inflationary effects that can be caused by excessive expansion of the money supply, Friedman, the father of monetarism, asserted that monetary policy should be conducted by targeting the rate of growth of the money supply in order to maintain economic and price stability. Friedman proposed the K-percent rule in his book A Monetary History of the United States 1867-1960, arguing that the money supply should grow at a constant annual rate tied to the growth of nominal GDP and expressed as a fixed percentage per year. As a result, the money supply is expected to grow moderately, businesses will be able to anticipate and plan for changes in the money supply every year, the economy will grow at a steady rate, and inflation will be kept low.

THE MONETARIST SYSTEM
The monetarist theory is an economic concept that holds that changes in the money supply are the most important determinants of the rate of economic growth and the business cycle’s behavior. When monetarist theory is implemented in practice, central banks, which control the levers of monetary policy, have significant influence over economic growth rates. Keynesian economics is a competing theory to monetarist economics.
Monetarist theory holds that as a country’s money supply expands, so will economic activity—and vice versa. A simple formula governs monetarist theory:
MV = PQ,
where M denotes the money supply,
V denotes the velocity (the number of times per year that the average dollar is spent),
P denotes the price of goods and services, and
Q denotes the quantity of goods and services.
Assuming constant V, increasing M causes either P, Q, or both P and Q to rise.
When the economy is close to full employment, general price levels tend to rise faster than production of goods and services. When there is slack in the economy, monetarist theory predicts that Q will rise faster than P.

Monetarists are economists and policymakers who subscribe to the theory of monetarism.
Monetarists believe that regulating the money supply is the most effective and direct way of regulating the economy
Famous monetarists include Milton Friedman, Alan Greenspan, and Margaret Thatcher.
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.
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.
Tenets is a principle or belief, especially one of the main principles of a religion or philosophy.These similar tenets are explained below :
A popular story promoted by Monetarist School thinkers is the one about Milton Friedman discrediting the Phillips Curve. For those not familiar with the latter, it’s the incorrect theory embraced by Keynesians that says economic growth is the cause of inflation.
Monetarists correctly argued that inflation is always a monetary phenomenon, but the newly revived theory that was long ago dismissed even by Friedman is merely a variation of the much discredited Phillips Curve. To put it plainly, monetarism is a parallel version of Keynesian demand management. Whereas Keynesians naively believe that government spending is a source of economic growth, monetarists in a similarly naïve way believe that money creation for the sake of it boosts the economy. Much as Keynesian demand through government spending allegedly increases growth and the price level, so does monetarist money creation per the other School’s theory. One School thinks government boosts growth, the other thinks money creation does, and both come to the same conclusion that inflation can be the end result of their central planning that allegedly leads to prosperity first. Comically, both sides believe that if they can manage the spending and money creation, that their expertise ensures a lack of what they presume inflation to be.

So while monetarism is associated with Friedman, and as such is viewed by some as ‘free market,’ make no mistake about what it really is. Monetarism, like its Keynesian twin, is central planning. Keynesians once again believe that growth is as simple as Washington taxing or borrowing away resources from the private sector so that it can be spent from the Commanding Heights. The juvenile logic underlying this school of thought is that when “aggregate demand” is down, governments must take funds from the private sector and spend without regard to the economic value of the spending.

Monetarists similarly focus on “aggregate demand,” but in their case they think it can be achieved through the printing press. As a recent article promoting the theory explained, more vibrant economic growth can be had with a “new monetary-policy regime that moves nominal spending back toward its pre-crisis trend and keeps its future growth stable.” Considering income, monetarists believe that, as opposed to investors, CEOs and market forces dictating what we earn, that the supposedly wise minds at the Fed can do a better job.
Arguably the biggest irony, one lost on these all-too-similar Schools of thought, is that their naïve hearts are in the right place. They want people to work and have more, so that they can consume more. The problem for proponents of both is that they clearly slept through their college lectures on Say’s Law, the latter a tautology that says production is the source of demand.
Ironic also is that these twin ideologies both put the cart before the horse. Keynesians believe government spending is the path to economic growth, as opposed to an effect of same
Monetarists desire unstable money that floats in value, meaning money that lacks credibility and that isn’t highly demanded. In short, monetarism is its own worst enemy.
What’s perhaps most comical about these two Schools, and it speaks to just how similar they are, is that both sides think a lack of their economic poison is at the heart of our malaise. Readers are surely familiar with Paul Krugman’s frequent Keynesian droolings about how the U.S. economy suffers because the federal government hasn’t spent enough of our money. Monetarists claim much the same; their view that the economy hasn’t recovered because our central bank hasn’t printed enough of our money. How these two Schools are enemies is one of life’s major mysteries given how they both put demand on a pedestal above all else, and both are convinced economic rebirth is only a trillion dollars of spending or many more trillions of dollar printing away.

The sad truth is that the U.S. economy struggles today thanks to the imposition of both pathetic ideologies. Government spending has risen to nosebleed levels alongside dollar creation in a similarly grotesque way. The economy sags as a result. Both sides should walk away from the discussion with the visible failures of their ideas well in mind. Only then, as in only when these adolescent twins cease poisoning the U.S. economy, will it resume the growth path that prevailed in the ‘80s and ‘90s.

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:

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.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

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HEZEKIAH JOY CHIWONKE
2019/245662
ECONOMICS/PHILOSOPHY
hezekiahjoy224@gmail.com

THE MONETARIST MACRO ECONOMIC SYSTEM

Economic stability is the absence of excessive fluctuations in the macro economy. It is to this end that the Keynesian economic school of thought (Fiscalists) and the adherents of Monetarism strive to showcase the fiscal policy and monetary policy respectively as a veritable tool. 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 macro economic theory which states that governments can foster economic stability by targeting the growth rate of the money supply. The monetarists emphasize that the role of money plays key in National income. Basically, they claim all recessions and depressions are caused by severe contraction of money and credit, and also booms and inflations by excessive increases in the money supply.
Professor Milton Friedman (1912- 2006) was the foremost exponent of the Monetarist Revolution. He is associated with the Chicago school which believes that the government should have little to no involvement in free market activities and that the best outcomes result when these markets allocate resources in an economy. His theory of monetarism stresses the importance of monetary policy as well as proposes that changes in the money supply have immediate and long term effects. Criticizing John Maynard Keynes’s emphasis on fiscal policy and making a restatement of Irving Fisher’s quantity theory of money, he laid emphasis on monetary policy and the quantity theory of money, which was what became known as Monetarism.
Friedman particularly asserts that the quantity theory of money is in the first instance a theory of demand for money, and not a theory of output, or of money, or of the price level as Fisher stated. Friedman stated that the demand for money must be influenced by the same factors that influence the demand for any other asset. He applied the theory of asset demand to money. For him, the demand of money should be a function of resources available to individuals (their wealth) and the expected returns on other assets relative to the expected return on money. Thus, money is an asset or capital good. Like Keynes, Friedman recognized that people want to hold certain amount of real money balances ( M/P) which is the quantity of money in real terms. Friedman’s formulation of the demand for money is given as :
M/P = f ( y, w, Rm, Rb, Re, Gp, u)
Where M: total stock of money demand
P: the price level
y: the real income
w: fraction of wealth in non-human form
Rm: expected nominal rate of return on money
Rb: expected rate of return on bonds including expected changes in their prices
Re: expected nominal rate of return on equities including expected changes in their prices.
Gp: expected rate of change of prices of goods and services and hence the nominal rate of return on physical assets.
u: other variables other than income.
This demand for money function depicts the reason why money is held and as such determines the total volume of assets held such as money ,physical assets, total wealth, human wealth e.t.c. But for Fisher, PT I.e. price level multiplied by the total amount of goods and services exchanged for money, gives the total demand for money.
Furthermore, for Friedman total wealth implies permanent income which is the average expected yield on wealth during its lifetime. This wealth is categorized into five different forms, which are; bonds, money, equities, human capital and physical goods. In contrast with Keynes’s view that support short-term solutions to spur consumer spending and the economy, in other words, government can spur spending by making a tax cut temporarily, Friedman showed that people adjusted their annual spending habits in response to real changes in their lifetime income (permanent income) and not in response to changes in their current income. This was Friedman’s first launch of attack on one of the assumptions of Keynesian models.
Notwithstanding, in his restatement of the quantity theory of money, the Supply of money is independent of the demand for money and is unstable due to the actions of monetary authorities, unlike the demand for money which is stable implying therefore that the demand for money is a stable function of people’s income. Professor Friedman defines the money supply at any moment of time as “literally the number of dollars people are carrying in their pockets, the number of dollars they have to their credit at banks or dollars they have to their credit at banks in the form of demand deposits and also commercial bank time deposits.” Time deposits are fixed deposits of customers in a commercial banks. Such deposits earn a fixed rate of interest varying with the time period for which the amount is deposited. Time deposits possess liquidity although, it doesn’t possess perfect liquidity as the amount lying in them can be withdrawn immediately by cheques, but the customer has to give a notice to the bank which allows the withdrawal after charging a penal interest rate from the depositor. His definition of money is more appropriate from the point of view of monetary policy as the central bank can exercise control over a wide area that includes both demand and time deposits held by commercial banks. His view on money supply is that it is exogenously determined by the central bank. For the Monetarists, the changes in the money supply affect aggregate demand through effects on a wide range of assets than the bonds only ,as Keynesians hold. And this view is based on their assertion that money is an asset. For instance, if the central bank increases the money supply, it affects interest rates in three ways. First there is liquidity effect, thereby causing a short-run reduction in interest rates, which will spur people to sell securities and as such will increase their holdings of money so that spend such excess money balances on financial assets and consumer goods. Then we have the output effect as the increase in aggregate expenditures on assets and goods will tend to raise output, employment and income, also the interest rates will rise. Finally, we have the price expectations effect which occurs due to the expectations of lenders that inflation will continue. With all these, the Monetarists are trying to prove that monetary policy has greater influence on economic activity as opposed to the Keynesian view that the monetary policy is less effective because of the relative inelasticity of aggregate expenditure.
Conclusively, the monetarists argue that economic recessions and expansions are caused by decreases and increases of the money supply. And as such Professor Friedman in his book A Monetary History of The U.S. (1963), held the US Fed responsible for the Great Depression as they significantly shrunk the money supply by over a third between 1929 and 1933. This is why the Monetarists advocate an annual fixed percentage growth in the money supply to allow for a natural growth. However the Keynesians find monetary policy ineffective for controlling severe depressions and thus depend upon fiscal policy for this, though they combine both policies for controlling booms and inflations.

REFERENCES
Macroeconomics J.L. JHIGHAN
https://www.Britannica.com>topics
https://www.economics help.org
https://www.investopedia.com>terms
https://en.m.wikipedia.org>wiki

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 (PQ) in 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.

UNIVERSITY OF NIGERIA, NSUKKA

FACULTY OF SOCIAL SCIENCES
DEPARTMENT OF COMBINED SOCIAL
SCIENCES

(ECONOMICS/PSYCHOLOGY)

TOPIC:
MONETERISM AND MONETERIST SYSTEM

NAME:
IFESINACHI CHIDINMA ADA

REG NO:

2019/246106

COURSE TITLE:
MACRO ECONOMICS II

COURSE CODE:
Eco 204

February,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.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 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.
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
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,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.

Reference:
https://www.britannica.com
https://www.investopedia.com

EKECHUKWU IFEANYI PAUL
2019/249227
ECONOMICS EDUCATION
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 MONETARIST VIEW that changes in the money stock area primary determinant of changes in total spending, and should thereby be given major emphasis in economic stabilization programs, has been of growing interest in recent years. From the mid-1930’s to the mid-1960’s. monetary policy received little emphasis in economic stabilization policy. Presumed failure of monetary policy during the early years of the Great Depression, along with the development and general acceptance of Keynesian economics, resulted in a main emphasis on fiscal actions — Federal Government spending and taxing programs — in economic stabilization plans. Monetary policy, insofar as it received any attention, was generally expressed in terms of market rates of interest. Growing recognition of the importance of money and other monetary aggregates in the determination of spending, output, and prices has been fostered by the apparent failure of stabilization policy to curb the inflation of the last half of the l 960’s. Sharply rising market interest rates w’ere interpreted to indicate significant monetary restraint, while the Revenue and Expenditure Control Act of 1968 was considered a major move toward fiscal restraint. Despite these policy developments, total spending continued to rise rapidly until late 1969, and the rate of inflation accelerated. Those holding to the monetarist view were not surprised by this lack of success.
TENETS OF MONETARIST MACRO ECONOMICS
• 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.

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
• 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.

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:

\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.

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

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ARTICLE SOURCES

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 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. 

more

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. 

more

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.

 more

Who Is Robert E. Lucas Jr.?

Robert E. Lucas Jr. is a New Classical economist who won the 1995 Nobel Memorial Prize in Economic Sciences for his research on rational expectations.

 more

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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

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.
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.
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.
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.

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 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.¬
In 1979, Paul A. Volcker became chairman of the Fed and made fighting inflation its primary objective. 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, to less than 5 percent by 1983.¬
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.
Relevant still
Still, 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 Chairman 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.¬

REFERENCES
Harvey, David (2005). A Brief History of Neoliberalism. Oxford University Press. ISBN 978-0-19-928326-2.

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 of 2007–09.¬
Today, 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.

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.

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.
Underlying the monetarist theory is the equation of exchange, which is expressed as MV = PQ. Here M is the supply of money, and V is the velocity of turnover of money (i.e., the number of times per year that the average dollar in the money supply is spent for goods and services), while P is the average price level at which each of the goods and services is sold, and Q represents the quantity of goods and services produced.
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.” In A Monetary History of the United States 1867–1960 (1963), Friedman, in collaboration with Anna J. Schwartz, presented a thorough analysis of the U.S. money supply from the end of the Civil War to 1960. This detailed work influenced other economists to take monetarism seriously.
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.

REFERENCES

Johnson, Harry G., 1971. “The Keynesian Revolutions and the Monetarist Counter-Revolution”, American Economic Review, 61(2), p. p. 1–14. Reprinted in John Cunningham Wood and Ronald N. Woods, ed., 1990, Milton Friedman: Critical Assessments, v. 2, p. p. 72 – 88. Routledge

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.
How monetarist policy 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
Monetarist theories
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. 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
There are two approaches to analyze the Quantity Theory of Money. These are Fisher’s Theory and Cash Balance Approach. In this article, we will look at both these approaches to understand the Quantity Theory of Money in detail.
Quantity Theory of Money
Fisher’s theory explains the relationship between the money supply and price level. According to Fisher,
MV = PT
Where,
M – The total money supply
V – The velocity of circulation of money. This also means that the average number of times a unit of money exchanges hands during a specific period of time.
P is the price level or the average price of the Gross National Product (GNP) and
T is the Total National Output.
Through this equation, Fisher showed that the relationship between money supply and the price level is direct and proportional. Also,The rate of change in money supplydMM=The rate of change in the price leveldPP
Quantity Theory of Money
Fisher based his theory on three assumptions:
The relationship between M and P is proportional only when there are no changes in the values of V and T. In other words when V and T are constant.
‘V’ or the velocity of circulation of money depends on the spending habits of people. Since the spending habits of people are more or less stable, V is constant.
In a situation of full employment or when all available factors of production are fully employed, ‘T’ or the Gross National Product is constant. At less than full employment, more money will lead to more output and hence, ‘P’ stays constant.
The demand for money exists for transaction purposes only. Also, people spend their entire income immediately for transactions.
Learn more about the Functions of Money and its Demand in detail here.
Criticisms of Fisher’s Theory
The Fisher’s equation is an abstract and mathematical truism. Also, it does not explain the process through which, ‘M’ affects ‘P’.
The assumption the people use up the entire ‘M’ to immediately buy ‘T’, is unreal. In real life, no one spends all the money the moment he earns it. Fisher fails to explain the precautionary and speculative uses of money.
There is no full employment. Every country has a natural rate of employment.
Even if there is full employment, a country can bring in factors from abroad (the ones that are not available within the economy) and rise the national output.
Since the theory assumes that people use the money only for transactions, it is usually called the Cash Transaction Theory.
Quantity Theory of Money – Cash Balance Approach
The Cash Balance Approach states that it is not the total money, but that portion of the cash balance that people spend which influence the price levels. Most people hold a cash balance in their hands rather than spending the entire amount all at once. According to this approach,
M = PKT
Where,
M – The money supply
P – The price level
T – The total volume of transactions and
K is the demand for money that people want to hold as cash balance
Quantity Theory of Money – Keynes
Keynes reformulated the Quantity Theory of Money. According to him, money does not directly affect the price level. Also, a change in the quantity of money can lead to a change in the rate of interest.
Further, with a change in the rate of interest, the volume of investment can change. Also, this change in investment volume can lead to a change in income, output, and employment along with a change in the cost of production.
Finally, all these factors will lead to a change in the prices of goods and services. In simple words, the Keynesian version of the Quantity Theory integrates the monetary theory with the general theory of value.

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.
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.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
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.

Reference
Kimberly, A. (2021). Monetarism explainedu the balance. Retrieved Feb 13, 2022, from The Balance Website:https://www.thebalance.com/monetarism-and-how-it-works-3305866

MONETARIST SYSTEM

Money has different forms and faces. From precious gold, silver and copper coins to paper claims on gold and finally fiat money guaranteed by a sovereign in the 19th century emerged first the Gold standard period since 1870, which featured a stable peg and exchange-rate of international currencies to gold, later on the dollar and pound were starting to take over that role, while stably being pegged to gold.

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.

MONETARIST
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.
Keynesian economics is a macroeconomic economic theory of total spending in the economy and its effects on output, employment, and inflation.

Monetarism – Main Points

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.

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 is associated with Milton Friedman.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.
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.6

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.Friedman’s monetarism is based on various analyzes of fundamental economic elements that include varying levels of aggregate demand, controversial theories of price inflation, and contrasting variants of money demand. However, no element proved as controversial as his analysis of the quantity theory of money, or the “equation of exchange.”

This equation, originating in the seventeenth century, puts forth a relationship between the quantity of money within an economy and the price level, and was often adhered to by classical economists. Milton Friedman, in expanding several theoretical elements of this equation in the mid-twentieth century, shaped the central elements of the monetarist school of economic thought.
The equation of exchange is delineated as: MV=PQ
Reference
https://www.newworldencyclopedia.org/entry/Info:Main_Page
https://www.britannica.com/topic/monetarism
https://en.m.wikipedia.org/wiki/Monetarism

Chisalum Emmanuel Chinecherem
2019/249408

What is the Monetarist Theory?
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 inflationInflationInflation is an economic concept that refers to increases in the price level of goods over a set period of time. The rise in the price level signifies that the currency in a given economy loses purchasing power (i.e., less can be bought with the same amount of money)..
 Increasing money supply, according to the theory, inevitably leads to higher prices and inflation, while decreasing the money supply leads to deflationDeflationDeflation is a decrease in the general price level of goods and services. Put another way, deflation is negative inflation. When it occurs, 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.
 

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.
* 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.

 
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.
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 DepressionThe Great DepressionThe 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.
 
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 RateFederal Funds RateIn the United States, the federal funds rate is the interest rate that depository institutions (such as banks and credit unions) charge other depository institutions. – 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
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.
 
Monetarism – Main Points
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.
 
Monetarist Theory vs. Keynesian Economics
Monetarism, as espoused by Friedman, stands in contrast to the Keynesian Economic TheoryKeynesian Economic TheoryKeynesian Economic Theory is an economic school of thought that broadly states that government intervention is needed to help economies emerge, 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.
 

THE MONETARIST VIEW that changes in the
money stock area primary determinant of changes
in total spending, and should thereby be given
major emphasis in economic stabilization programs,
has been of growing interest in recent years. From
the mid-1930’s to the mid-1960’s. monetary policy received little emphasis in economic stabilization policy.
Presumed failure of monetary policy during the
early years of the Great Depression, along with the
development and general acceptance of Keynesian
economics, resulted in a main emphasis on fiscal actions — Federal Government spending and taxing
programs
—
in economic stabilization plans. Monetary
policy, insofar as it received any attention, was generally expressed in terms of market rates of interest.
Growing recognition of the importance of money
and other monetary aggregates in the determination
of spending, output, and prices has been fostered by
the apparent failure of stabilization policy to curb
the inflation of the last half of the l
960’s. Sharply
rising market interest rates w’ere interpreted to indicate significant monetary restraint, while the Revenue and Expenditure Control Act of 1968 was considered a major move toward fiscal restraint.
Despite these policy developments, total spending
continued to rise rapidly until late 1969, and the rate
of inflation accelerated. Those holding to the monetarist view were not surprised by this lack of success Offering helpful suggestions throughout the study were
Denis Karnosky of this bank, William P. Yohe of Duke University and visiting Scholar at this bank, 1969-70,
David Fand of Wayne State University. Susan Smith provided programming assistance and Christopher Babb and
H. Albert Margolis advised on statistical problems. The
authors thank the following for their comments on earlier
drafts, without implying their endorsement of either the
methods of analysis or the conclusions F. Gerard Adams,
Philip Cagan, E. Gerald Corrigan, Richard Davis, Ray Fair,
Edgar Fiedler, Milton Friedman and members of the Money
and Banking Workshop at the University of Chicago, Edward
Gramlieh, Harry C. Johnson, John Kalchbrenner, Edward
Kane, Michael Keran, Allan Meltzer, Franco Modigliani,
George Morrison, David Ott, Joel Popkin, Thomas Saving,
Roger Spencer, Henry Wallich, Clark Warburton, Manfred
Willms, and Arnold Zellner.
in curbing excessive growth in total spending, largely
because the money stock grew at a historically rapid
rate during the four years ending in late 1968. Economic developments from 1965 through 1969 were in
general agreement with the expectations of the
monetarist view.
This article develops a model designed to analyze
economic stabilization issues within a framework
which focuses on the influence of monetary expansion on total spending. Most of the major econometric
models have not assigned an important role to the
money stock or to any other monetary aggregate.1
Furthennore, most econometric models contain a large
number of behavioral hypotheses to be empirically
estimated and integrated with each other, because
they are designed to aid in understanding the determination of many economic magnitudes. By comparison, the model presented in this article is quite small.
It is designed to provide information on the most
likely course of movement of certain strategic economic variables in response to monetary and fiscal
actions.
Frank de Leeuw and Edward M. Cramlieh, “The Federal
Reserve-MI’I’ Econometric Model,” Federal Reserve Bulletin (January 1968), pp. 11-40, and “The Channels of
Monetary Policy: A Further Report on the Federal Reserve
MIT Econometric Model,” Federal Re~~~erveBulletin (June
1969), pp. 472-91; James S. Duesenberry, Gary Fromm,
Lawrence R. Klein, and Edwin Kuh (ed), The Brookings
Quarterly Econometric Mode? of the United States (Chicago:
Rand McNally, 1965), and The Brookings Model: Some
Further Results (Chicago: Rand McNally, 1969); Michael
K. Evans and Lawrence R. Klein, The Wharton Econometric
Forecasting Model, 2nd Enlarged Edition (Philadelphia:
University of Pennsylvania, 1968); Maurice Liebenberg,
Albert A. Hirsch, and Joel Popkin, “A Quarterly Econometric Model of the United States: A Progress Report,”
Survey of Cur,’ent Business (May 1966), pp. 423-56; Daniel
M. Suits,
“The Economic Outlook for 1969,” in The
Economic Outlook for 1969, Papers presented to the Sixteenth Annual Conference on the Economic Outlook at The
University of Michigan (Ann Arbor: University of Michigan,
1969), pp. 1-26. For a discussion of the role of money in
these models, see David I. Fand, “The Monetary Theory of
Nine Recent Quarterly Econometric Models of the United
States,” forthcoming in the Journal of Money, Credit, and
B

NAME: UDEH GODWIN ONYEKA
REG. NO: 2016/237158
DEPARTMENT: COMBINED SOCIAL SCIENCE (ECONOMICS/SOCIOLOGY AND ANTHROPOLOGY)
COURSE CODE: ECO 204
COURSE TITLE: INTRODUCTION TO MACRO ECONOMICS II
ASSIGNMENT
Discuss monetarist macroeconomics system.
ANSWER
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. 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.
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 policy.
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. 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.

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.

REFERENCES
T.J. Sargent and N. Wallace (1976) “Rational Expectations and the Theory of Economic Policy”, Journal of Monetary Economics, Vol. 2, p.169-83.
A.J. Schwartz (1981) “Understanding 1929-33”, in K.Brunner, editor, The Great Depression Revisited. Boston: Martinus-Nijhoff.
H.C. Simons (1934) “Positive Program for Laissez Faire: Some proposals for a liberal economic policy”, Public Policy Pamplet. Chicago: University of Chicago Press. Reprinted in Simons, 1948.
H.C. Simons (1936) “Rule versus Authorities in Monetary Policy”, Journal of Political Economy, Vol. 44 (1), p.1-30. Reprinted in Simons, 1948.
H.C. Simons (1948) Economic Policy for a Free Society. Chicago: University of Chicago Press.
C.A. Sims (1972) “Money, Income and Causality”, American Economic Review, Vol. 62 (4), p.540-52.
C.A. Sims (1980) “Comparison of Interwar and Postwar Business Cycles: Monetarism reconsidered”, American Economic review, Vol. 90 (2), p.250-7.
R.M. Solow (1968) “Recent Controversy on the Theory of Inflation”, in S. Rousseas, editor, Preoceedings of a Symposium on Inflation. Wilton, Conn: Kazanjian Economics Foundation.
R.M. Solow (1978) “Summary and Evalution”, in After the Phillips Curve: Persistence of high inflation and high unemployment. Boston: Federal Reserve.
P. Temin (1976) Did Monetary Forces Cause the Great Depression?. New York: Norton.
J. Tobin (1963) “Commercial Banks as Creators of Money”, in D. Carson, editor, Banking and Monetary Studies. Homewood, Ill.: Irwin.
J. Tobin (1965) “The Monetary Interpretation of History”, American Economic Review, Vol. 55 (3), p.645-84.
J. Tobin (1970) “Money and Income: Post Hoc Ergo Propter Hoc?”, Quarterly Journal of Economics, Vol. 84 (2), p.301-17.
J. Tobin (1970) “Rejoinder to Friedman”, Quarterly Journal of Economics, Vol. 84, p.327-
J. Tobin (1972) “Friedman’s Theoretical Framework”, Journal of Political Economy, Vol. 78 (6), p.853-63. Reprinted in Gordon, 1974.
J. Tobin. (1972) “Inflation and Unemployment”, American Economic Review, Vol. 62, p.1-18.
J. Tobin (1980) Asset Accumulation and Economic Activity: Reflections on contemporary macroeconomic activity. Chicago: University of Chicago Press.
J. Tobin (1981) “The Monetarist Counter-Revolution Today: An appraisal”, Economic Journal, Vol. 91 (1) p.29-42.
J. Tobin (1982) “Money and Finance in the Macroeconomic Process”, Journal of Money, Credit and Banking, Vol. 14 (2), p.171-204.
S.J. Turnovsky (1972) “The Expectations Hypothesis and the Aggregate Wage Equation: Some empirical evidence for Canada”, Economica, Vol. 39, p.1-17.
S.J. Turnovsky and M.L. Wachter (1972) “A Test of the Expectations Hypothesis Using Directly Observed Wage and Price Expectations”, Review of Economics and Statistics, Vol. 54, p.47-54.
M.L. Wachter (1976) “The Changing Cyclical Responsiveness of Wage Inflation”, Brookings Papers on Economic Activity, 1, p.115-59.
C. Warburton (1946) “The Misplaced Emphasis in Contemporary Business-Fluctuation Theory”, Journal of Business of the University of Chicago, Vol. 19 (4), p.199-220. Reprinted in Warburton, 1966.
C. Warburton (1950) “The Monetary Disequilibrium Hypothesis”, American Journal of Economics and Sociology, Vol. 10 (1), p.1-11. Reprinted in Warburton, 1966.
C. Warburton (1952) “How Much Variation in the Quantity of Money is Needed?”, Southern Economic Journal, Vol. 18 (4), p.495-509. Reprinted in Warburton, 1966.
C. Warburton (1966) Depression, Inflation and Monetary Policy: Selected papers, 1945-1953. Baltimore, MD: Johns Hopkins University Press.

Okafor chukwubuikem Emmanuel
2019/245070

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:

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.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

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Monetary policy talks about federal reserve, its a fundamental tool used by government to control and manipulate money supply which influence economic growth.
According to statistical studies,the relationship between the money supply and economic growth is positively related. This reviled that a growth in money supply will lead to economic growth and stabilised economy as a whole. The federal government of Nigeria uses monetary policies to control the aggregate demand of goods and services. For instance, an increase in the aggregate demand will surely lead to an increase in production, and curbs unemployment bringing about job creation.
One of the methods in which government applies monetary policy is by adjusting interest rate, for instance, the federal government can decide to increase interest rate through the influence of the central bank, this will influence citizens/individuals marginal propensity to consume and also the effect of the multiplier.
A decrease in interest rate will result to higher consumption of consumer goods, and money at hand and also discourage savings and vice versa.

Monetarism is uniquely associated with an economist called Milton Friedman who propounded the theory, of the quality theory of money. He advices the government to apply his theory by keeping supply of money fairly steady, increasing it slightly to encourage natural economic growth
Excessive money supply brings about inflation , because a lot of money will be chasing fewer goods. Friedman proposed a fixed growth rate called the k-percent rule. This rule suggests that money supply should grow at annual rate linked with the nominal gross domestic products (GDP) as expressed at a fixed percentage per year.
This rule would be efficient in the planning both at the private and public sector of the economy

Central to monetarism is the quantity theory of money which was adopted and imputed into the general Keynesian framework of macroeconomics. The quantity theory of money can be expressed in equation, which is money supplied multiplied by velocity of money (the rate at which money change hand) is equal to average price of goods and services multiplied by output (quantity of goods and services). This equation formulated by John Stuart mill given as MV=PQ
M- money supply
V- velocity
P- average price of commodities
Q- output (quantity of commodities)
This equation is linked together because a change in M either decreases or increases would lead to a change in either P or Q

Finally, we would conclude that the role of monetary policies as an economic tool in regulating the economic activities in the nation cannot be over emphasised.
Hence, in other to achieve stability in the economy which leads to economic growth monetarism plays a vital role for the government.

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.
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.

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:
\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.
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.

Discussion of monetarism and Monetarist Economic Systm
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 Uio.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.

REFERENCE
D. E. W. Laidler, ‘Monetarism: An Interpretation and an Assessment’, Economic Journal (March 1981).
D. Higham and J. Tomlinson, ‘Why do Governments Worry About Inflation?’, Westminster Bank Review (May 1982).
G. E. J. Dennis, Monetary Economics (Longman, 1981) chs 5, 6.
J. Burton, ‘The Varieties of Monetarism and their Policy Implications’, Three Banks Review (June 1982).
K. Cuthbertson, Macroeconomic Policy: The New Cambridge, Keynesian and Monetarist Controversies (Macmillan, 1979) esp. pp. 1–12 and ch. 5.
Lord Kaldor and N. Trewithick, ‘A Keynesian Perspective on Money’, Lloyds Bank Review (January 1981).
M. Panić, ‘Monetarism in an Open Economy’, Lloyds Bank Review (July 1982).
R. Tarling and F. Wilkinson, ‘Inflation and the Money Supply’, Cambridge Economic Policy Review, no. 3 (1977).
T. Congdon, ‘Why has Monetarism Failed so Far?’, The Banker (March-April, 1982).
T. Mayer, The Structure of Monetarism (Norton, 1978).

DISCUSS MONETARIST MACRO
ECONOMIC SYSTEM
Monetarism or Monetarist Macroeconomic system as it implies 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.
UNDERSTANDING THE MONETARY MACRO
ECONOMIC SYSTEM
Furthermore lets understand that 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. In other words the Monetary Macroeconomic system or Monetarism is
• 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.
• 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, while Keynesians argue for active government intervention.
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:
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.
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.
MONETARIST THEORY VS KEYNESIAN
ECONOMICS
Monetarism, as espoused 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 o 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.
HISTORY OF THE MONETARIST THEORY
We are further going to discuss briefly on the history of the monetarist Macroeconomic system or 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. 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 – KEY VITAL POINTS.
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 level.
• 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.
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.
CONCLUSION
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. There are also arguments that monetarism is a special case of Keynesian theory. The central test case over the validity of these theories would be the possibility of a liquidity trap, like that experienced by Japan. Ben Bernanke, Princeton professor and another former chairman of the U.S. Federal Reserve, argued that monetary policy could respond to zero interest rate conditions by direct expansion of the money supply. In his words, “We have the keys to the printing press, and we are not afraid to use them. These disagreements—along with the role of monetary policies in trade liberalisation, international investment, and central bank policy—remain lively topics of investigation and argument.
REFERENCES
CFI Commercial Banking & Credit Analyst (CBCA)™
The Library of Economics and Liberty. “Monetarism.” Accessed Sept. 9, 2020.
*D. E. W. Laidler, ‘Monetarism: An Interpretation and an Assessment’, Economic Journal (March 1981).
• Friedman, Milton. “The Role of Monetary Policy.” American Economic
• Brunner, Karl, and Allan H. Meltzer. “An Aggregate Theory for a Closed Economy.” In Jerome L. Stein, ed.
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.

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 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.

Basic tenent 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 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

US & WORLD ECONOMIES ECONOMIC THEORY
Monetarism Explained Nobel Prize-winning economist Milton Friedman attends a 1986 Beverly Hills charity dinner in his honor. Duringthe 1980s, Friedman’s monetarist policies ruled.
•••
BY KIMBERLY AMADEO Updated May 09, 2021
REVIEWED BY THOMAS J. CATALANO
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 Monetarist
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. 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. 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.5
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. 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.

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.9 That ended the out-of-control inflation, but it helped create the 1980-82 recession.

Reference
Monetary and Fiscal Actions: A Test of Their Relative Importance in Economic Stabilisation — Reply”, Federal Reserve Bank of St. Louis Review (April),
Friedman, Milton (1970). “A Theoretical Framework for Monetary Analysis”. Journal of Political Economy.
Monetary History of the United States, 1867-1960. Princeton University Press.
Monetarism”, The New Palgrave: A Dictionary of Economics, v. 3, Reprinted in John Eatwell et al. (1989), Money: The New Palgrave

Name: Ogbonna Mmesoma Rita
Reg no:2019/243578
Department: Social Science Education/Economics
Email address: alexmmesoma4@gmail.com
Assignment Topic: Discuss Monetarist Macroeconomic System

The monetarist system is an macroeconomic 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 system works in practice, central banks, which control the levers of monetary policy, can exert much power over economic growth rates.
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.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.2
Monetarism has recently gone out of favor.3.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 policy.
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.
Examples of Monetarist system
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.
Monetarist systemis 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.
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.
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.

Reference
Kimberly, Amadeen(2021) Monetarism Retrieved on 07/02/2022 in
http://www.thebalance.com.
Will, Kenton (20oh21) Monetarist system Retrieved on 07/02/2022 in
http://www.investopedia.com.
Osikhotsali,momoh (2021) Monetarist explained and Examples
Retrieved on 07/02/2022 in http://www.investopedia.com.

Odo Linda Amarachi
2019/244376
Economics

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 outputOdo Linda Amarachi
2019/244376
Economics

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.

The monetarist system or 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.classical economists who are subscribers to the theory believe that money supply is a primary determinant of price levels and inflation. According to the theory, increasing money supply inevitably leads to higher prices and inflation, while decreasing money supply leads to deflation and risks, causing 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.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.
While economists Clark Warburton initially posited much of the monetarist theory immediately following world war ll, 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. Milton Friedman argued based on the quantity theory of money, that the government should keep the money 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, Friedman proposed 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 products(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.
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.
Monetarist theory is governed by a simple formula:MV=PQ, M is the money supply, V is the velocity (number of times per year the average naira is spent), P is the price of goods and services and Q is the quantity of goods and services. This is the 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. 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.
Monetary economists believe that the central bank’s manipulation of the money supply should be restricted. They believe that a central bank 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.
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. 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.
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.

NAME:- UZOCHUKWU CHIDINMA VIVIAN.
REGISTRATION NUMBER:- 2017/250786.
COURSE:- MACRO-ECONOMICS.

MONETARIST 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. 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 MONETARIST 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}
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 THEORY.
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.

REFERENCES.
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.

Federal Revenue Bank of St Louis, Effective Federal funds rate https://fred.stlouisfed.org/series/FEDFUNDS; Accessed May 5,2021.

International Monetary Fund , What is Monetarism ? https://www.imf.org/external/pubs/ft/fandd/2014/03/basics.htm.

The monetarist system is an economic school of thought which states that the supply of money in an economy is the primary determinant of economic growth. Monetarism a macroeconomic theory which states that governments can foster economic stability by targeting the growth rate of the money supply. But there are also some other factors that determine economic growth. For instance, an increase in aggregate demand encourages job creation, which reduces the rate of unemployment and stimulates economic growth. Also, monetary policy is an economic tool used in monetarism to implement and 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.
Friedman, in his book, A Monetary History of the United States 1867– 1960, 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. 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. Due to the inflationary effects that can be brought about by the excessive expansion of the money supply, Friedman, asserted that monetary policy should be done by targeting the growth rate of the money supply to maintain economic and price stability.
The quantity theory of money can be summarized in 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
P= price
Q= quantity of output
The monetarists believe that changes to M (money supply) is the driver of the equation. A change in M directly affects and determines employment, inflation (P), and production (Q). Velocity (V) is held to be constant.
John Maynard Keynes countered this assumptions and is not assumed by the monetarists, he 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 run and economic output in the short run. A change in the money supply directly determines prices, production, and employment.
Keynes’ theory, known as, liquidity preference theory emphasizes how changes in money demand (and thus velocity) influence the price level and aggregate demand. Velocity should not be constant since the economy is volatile and subject to periodic instability.
Monetarism builds on the Keynesian theory by assuming the same macroeconomic framework and integrating the equation of exchange (with V not constant, 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.

Daniel Unique Agbenu
2019/246710
Economics department
Eco 204 assignment

The Economic School of Monetarism emerged in the seventeenth and eighteenth centuries,
when the economic system of capitalism replaced the economic system of feudalism (Karl Marx, 1857). In the economy of capitalism, trade and monetary exchanges grew significantly, a process that not only accompanied the accumulation of capital (precious metals) but also changed the structure of production. In the twentieth century, the Economic School of Monetarism developed under the influence of Milton Friedman’s ideas and led to the emergence of the Chicago School. Economic freedom as a high goal is a means to achieve political freedom as a highest goal (Milton Friedman, 1961). 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.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.
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.Monetarists 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. The money’s demand and supply determine the interest rate in the economy.Ultimately, interest rates influence decisions, such as consumption and investment. Some household purchases rely on bank loans, as well as investments by businesses.
Monetary policy affects the amount of money circulating in the economy. During periods of weak growth, policymakers should increase the money supply. And, during an economic boom, policymakers reduce the money supply, thereby slowing the inflation rate.The modern economy cannot run without money. Money represents the monetary (financial) side of the economy, complementing the non-financial side (goods and services). Without it, you cannot buy goods and services or save for retirement.
The root of the monetarist school of thought
Monetarist argued that inflation is a monetary phenomenon.Due to monetary phenomena, the key to influencing inflation is the amount of money in the economy. The policy to influence the money supply is what we call monetary policy.Friedman advises central banks to maintain growth in the money supply at a rate consistent with growth in productivity and demand for goods. Otherwise, it can produce negative consequences such as hyperinflation and deflation.
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.

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.

The central bank of a country can expand or contract the money supply through the manipulation of interest rates.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
Underlying the monetarist theory is the equation of exchange, which is expressed as MV = PQ. Here M is the supply of money, and V is the velocity of turnover of money (i.e., the number of times per year that the average dollar in the money supply is spent for goods and services), while P is the average price level at which each of the goods and services is sold, and Q represents the quantity of goods and services produced.

Economic stabilizer: Monetary policy
Another point of view holds that the fiscal approach presented above is misleading because it ignores.
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.

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.

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Economics & Economic Systemsprice, the amount of money that has to be paid to acquire a given product. Insofar as the amount people are prepared to pay for a product represents its value, price is also a measure of value.
in the relatively free market economies of the developed Western world there are all kinds of distortions—arising out of monopolies, government interference, and other conditions—the effect of which reduces the efficiency of price as a determinant of supply and demand. In centrally planned economies, the price mechanism may be supplanted by centralized governmental control for political and social reasons. Attempts to operate an economy without a price mechanism usually result in surpluses of unwanted goods, shortages of desired products, black markets, and slow, erratic, no economic growth.

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ANALYSIS OF 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.

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.

The central bank sets monetary policy without government interference. They operate 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
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 central bank 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.

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ANSWER
Monetarism is a macroeconomic theory which states that governments can foster economic stability by targeting the growth rate of the money.
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. … The monetarist approach became influential during the 1970s and early ’80s..
A theory in Economics that stable economic growth can be assured only by control of the rate of increase of the money supply to match the capacity for growth of real productivity.
MONETARIST SYSTEM
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.
A monetary system is a system by which a government provides money in a country’s economy. Modern monetary systems usually consist of the national treasury, the mint, the central banks and commercial banks.

NAME: OKORO-PETER OGOEGBU NNENNA
DEPT: COMBINED SOCIAL SCIENCES(ECO/POL)
REG NO: 2019/243013
COURSE: MACROECONOMICS 2 (ECO 204)
ASSIGNMENT: UNDERSTANDING MONETARISM AND MONETARIST 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, 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 shortNAME: OKORO-PETER OGOEGBU NNENNA
-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.
Underlying the monetarist theory is the equation of exchange, which is expressed as MV = PQ. Here M is the supply of money, and V is the velocity of turnover of money (i.e., the number of times per year that the average dollar in the money supply is spent for goods and services), while P is the average price level at which each of the goods and services is sold, and Q represents the quantity of goods and services produced.
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.
1. The economy is inherently stable. Markets work well when left to themselves. Government intervention can often times destabilize things more than they help.
2. 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.
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.
At its core, monetarism is an economic formula. It states that money supply multiplied by its velocity (the rate at which money changes hands in an economy) is equal to nominal expenditures in the economy (goods and services) multiplied by price. While this makes sense, monetarists say velocity is generally stable, which has been debated since the 1980s.
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.
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 (see “What Is the Output Gap?” in the September 2013 F&D).­
REFERENCES
http://www.investopedia.com
en.m.wikipedia.org
http://www.econweb.com

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Name: Udeh Mgbechi Mary
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INTRODUCTION
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 focuses on the macroeconomic effects of the supply of money and the role of central banking on an economic system.
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.
Quantity Theory of Money
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. Underlying the monetarist theory is the equation of exchange, which is expressed as MV = PQ. Here M is the supply of money, and V is the velocity of turnover of money (i.e., the number of times per year that the average dollar in the money supply is spent for goods and services), while P is the average price level at which each of the goods and services is sold, and Q represents the quantity of goods and services produced.
What is the Monetarist Theory?
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, 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.
Followers of the Monetarism school not only sought to explain contemporary problems but also interpret historical ones. Within A Monetary History Milton Friedman and Anna Schwartz argued that the Great Depression of 1930 was caused by a massive contraction of the money supply and not by a dearth of investment as argued by Keynes. They also maintained that post-war inflation was caused by an over-expansion of the money supply.
Friedman argued that “inflation is always and everywhere a monetary phenomenon” and advocated a central bank policy aimed at keeping the supply and demand for money at an economic equilibrium, as measured by a balanced growth in productivity and demand. Friedman originally proposed a fixed “monetary rule,” where the money supply would be calculated by known macroeconomic and financial factors and would target a specific level or range of inflation. There would be no leeway for the central reserve bank, and businesses could anticipate all monetary policy decisions.

Reference
Chevallier, J. P. On the Inverse Relation Between Excess Money Supply and Growth, Monetary Creation, Aggregates and GDP Growth. Retrieved 16 January, 2007.
Encyclopædia Britannica. 2006. Monetarism. Encyclopædia Britannica Online. Retrieved 18 December, 2006.
Friedman, Milton and Anna Jacobson Schwartz. Monetary History of the United States, 1867-1960, Princeton, NJ: Princeton University Press, 1971. ISBN 0691003548
Britannica, The Editors of Encyclopaedia. “monetarism”. Encyclopedia Britannica, 3 Oct. 2018, https://www.britannica.com/topic/monetarism. Accessed 11 February 2022.