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

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

In view of the above, clearly discuss and analyze the Monetarist System and their tenets.

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  1. Avatar AGBO EBUBE EDITH says:

    AGBO EBUBE EDITH
    2017/249475
    Monetarism
    Monetarism is the theory or practice of controlling the supply of money as the chief method of stabilizing the economy.
    Monetary theory posits that a change in money supply is a key driver of economic activity. A simple formula, the equation of exchange, governs monetary theory: MV = PQ. The Federal Reserve (Fed) has three main levers to control the money supply: the reserve ratio, discount rate, and open market operations.
    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.

  2. 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.

  3. 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=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.

    

  4. Avatar Jennifer chikaodi Amatu 2019/249035 says:

    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

  5. Avatar OPERA PRINCESS ADANNA 2019/245454 says:

    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.
    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 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.

    How Money Supply Affects the Economy
    The central bank of a country can expand or contract the money supply through the manipulation of interest rates.

    For example, in the United States, the Federal Reserve can change the Fed Funds Rate – the interest rate at which banks can lend money overnight to other banks. The Fed funds rate affects all other interest rates in the economy.

    When the Fed funds rate is higher, interest rates increase overall. It decreases the amount of money lent to businesses and consumers, thus reducing spending and economic growth. Conversely, lowering interest rates increases borrowing by consumers and businesses, thus boosting spending and stimulating economic growth.

    The Underlying Equation
    There is an underlying equation that forms the foundation of the monetarist theory. It is known as the “equation of exchange” (also referred to as the “quantity theory of money”). Although the equation’s become quite complex due to its expansion and refinement by recent economists, the basic equation is expressed as follows:

    Monetarist Theory – Equation

    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 – GDP) and employment levels.
    The best monetary policy for a central bank to follow is to peg the money supply’s growth rate to match the rate of growth of real GDP – it is the best policy to support continuing economic growth and keep the rate of inflation relatively low.
    The last point is the key to the monetarist theory. Monetarist economists believe that the central bank’s manipulation of the money supply should be restricted. They believe that a central bank that more actively attempts to change the money supply is more likely to harm the economy than to benefit it.

    However, this contention may be heavily tied to the monetarists’ basic distrust of central banks as an institution. The idea runs counter to the Keynesian Economic Theory, which favors active, unrestricted intervention by the central bank.

    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 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.
    SUMMARY
    1. The monetarist theory, as popularized by Milton Friedman, asserts that money supply is the primary factor in determining inflation/deflation in an economy.
    2. 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.
    3. 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.

  6. 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.

  7. Avatar Nwokedi Samuel Chinenye 2019/241213 says:

    Nwokedi Samuel Chinenye 2019/241213
    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.

  8. Avatar Adigwe Chibuikem Anthony says:

    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.

  9. Avatar Amatu Jennifer chikaodi 2019/249035 says:

    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

  10. Avatar Nwokedi Samuel Chinenye 2019/241213 says:

    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.

  11. Avatar Nwokedi Samuel Chinenye says:

    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.

  12. Avatar MBADIWE KELECHI EMMANUEL says:

    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.

  13. Avatar Okaforukwu Chizaram Sandra says:

    NAME: OKAFORUKWU CHIZARAM SANDRA
    REG NO : 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.

  14. Avatar Ugwuoke Kosisochuwu precious says:

    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.

  15. Avatar Nnoli izuchukwu kosisochukwu 2019/242969 (eco/Psy) says:

    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.

  16. 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.

  17. Avatar ONYISHI RITA IFEBUCHE says:

    NAME: ONYISHI RITA IFEBUCHE
    DEPARTMENT: EDUCATIONAL FOUNDATIONS
    UNIT: SPECIAL EDUCATION/ECONOMICS
    REG:2018/243757
    COURSE TITLE: INTRODUCTION TO MACROECONOMICS THEORY 11
    ASSIGNMENT ON ECO 204
    QUESTION:MONETARISM AND MONETARIST 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. Monetarists believe monetary policy is more effective than fiscal policy government spending and tax policy. Stimulus spending adds to the money supply, but it creates a deficit adding to a country’s sovereign debt. That could increase interest rates.Monetarists say that central banks are more powerful than the government because they control the money supply.They also tend to watch real interest rates rather than nominal rates. Most published rates are nominal rates, while real rates remove the effects of inflation. Real rates give a truer picture of the cost of money.
    Monetarism has recently gone out of 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.
    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.

  18. Avatar Akaenweokwu Anthony Nnamdi says:

    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.

  19. Avatar ALOZIE UCHE DANIEL says:

    NAME: ALOZIE UCHE DANIEL
    REG NO: 2019/245679
    COURSE: MACRO ECONOMICS
    COURE CODE: ECO 204

    Monetarists believe that the economy can have stability, when they is a targeted control on the growth rate at which money is supplied in a nations economy.
    The monetary system and monetary policy according to monetarism and monetarist economists is a key tool in enhancing the economy and economic activities being that monetary policy affects money supply by controlling interest rates and the money in stock of a nation,it will also affect real GDP and National income.

    Milton Friedman,a monetarist economist whom was a key figure in the monetarism ideology,suggested that the cause of inflation in the US economy in the 1970’s was as a result of an excess increase in the supply of money in the central bank of the US and in their federal reserve in the 1970’s.

    The tenets of monetarism:
    1. Long run monetary neutrality: This implies that an increase in the money supplied in an economy and also in the money in stock in the economy in the long-run does not affect consumption and output.

    2. Short-run monetary non neutrality: This implies that an increase in the money supplied in an economy and in the money in stock in a nations economy in the short run,temporarily affects output and employment because wages and salaries are flexible.

    3. Normal monetary movements: An increase in money supplied and in the money stock,should match economic growth.
    For example, If there is a 2 percent increase in the real GDP, there should be a corresponding 2 percent increase in the money supplied.

  20. Avatar Zara Okaforukwu says:

    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.

  21. Avatar Emesih Amaramsinachi Catherine says:

    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.

  22. Avatar Emesih Amaramsinachi Catherine says:

    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.

  23. Avatar Chukwudolue kamsi Edward 2019/244066 says:

    Chukwudolue kamsi Edward 2019/244066
    Monetarist system is an economic school of thought that stresses the primary importance of the money supply in determining nominal GDP and the price level. It is an economic theory that says the money supply is the most important driver of economic growth. As the money supply increases, people demand more. Factories produce more, creating new jobs. The “Founding Father” of Monetarism is economist Milton Friedman. Monetarism is a theoretical challenge to Keynesian economics that increased in importance and popularity in the late 1960s and 1970s. In fact, the tide was so strong that in 1979 the Federal Reserve switched its operating strategy more in line with Monetarist theory, though they subsequently abandoned the strategy in 1982 for a number of reasons.
    The challenge to the traditional Keynesian theory strengthened during the years of stagflation following the 1973 and 1979 oil shocks. Keynesian theory had no appropriate policy responses to the supply shocks. Inflation was high and rising through the 1970s and Friedman argued convincingly that the high rates of inflation were due to rapid increases in the money supply. He argued that the economy may be complicated, but stabilization policy does not have to be. The key to good policy was to control the supply of money.
    People who believe in monetarist system warn that increasing the money supply only provides a temporary boost to economic growth and job creation. Over the long run, increasing the money supply increases inflation. As demand outstrips supply, prices will rise to match.
    Monetarist theory views velocity as generally stable, which implies that nominal income is largely a function of the money supply. Variations in nominal income reflect changes in real economic activity (the number of goods and services sold) and inflation (the average price paid for them).
    The quantity theory is the basis for several key tenets and prescriptions of monetary output.
    1. Long-run monetary neutrality: An increase in the money stock would be followed by an increase in the general price level in the long run, with no effects on real factors such as consumption or output.
    2. Short-run monetary non-neutrality: An increase in the stock of money has temporary effects on real output (GDP) and employment in the short run because wages and prices take time to adjust (they are sticky, in economic parlance).
    3. Constant money growth rule: Friedman, who died in 2006, proposed a fixed monetary rule, which states that the Fed should be required to target the growth rate of money to equal the growth rate of real GDP, leaving the price level unchanged. If the economy is expected to grow at 2 percent in a given year, the Fed should allow the money supply to increase by 2 percent. The Fed should be bound to fixed rules in conducting monetary policy because discretionary power can destabilize the economy.
    4. Interest rate flexibility: The money growth rule was intended to allow interest rates, which affect the cost of credit, to be flexible to enable borrowers and lenders to take account of expected inflation as well as the variations in real interest rates.

  24. Avatar Uzoka ikechukwu precious says:

    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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  25. Avatar Dike Nwachukwu Onyedikachukwu 2019/241349 says:

    Dike Nwachukwu Onyedikachukwu
    2019/241349
    Monetarism is a school of thought in monetary economics that emphasizes the role of governments in controlling the amount of money in circulation. Monetarist theory asserts that variations in the money supply have major influences on national output in the short run and on price levels over longer periods. Monetarists assert that the objectives of monetary policy are best met by targeting the growth rate of the money supply rather than by engaging in discretionary monetary policy.Monetarism is commonly associated with neoliberalism. Monetarism today is mainly associated with the work of Milton Friedman, who was among the generation of economists to 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”.

    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 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.

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

    Most monetarists oppose the gold standard. Friedman viewed a pure gold standard as impractical. For example, whereas one of the benefits of the gold standard is that the intrinsic limitations to the growth of the money supply by the use of gold would prevent inflation, if the growth of population or increase in trade outpaces the money supply, there would be no way to counteract deflation and reduced liquidity (and any attendant recession) except for the mining of more gold. But he also admitted that if a government was willing to surrender control over its monetary policy and not to interfere with economic activities, a gold-based economy would be possible.
    Former Federal Reserve chairman Alan Greenspan argued that the 1990s decoupling was explained by a virtuous cycle of productivity and investment on one hand, and a certain degree of “irrational exuberance” in the investment sector on the other.

    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.

  26. Avatar Hezekiah Joy Chiwonke says:

    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

  27. Avatar Francis+chinedu+Michael says:

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

  28. Avatar Chukwukaodinaka John Oluchukwu 2019/245518 says:

    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.

  29. Avatar Nkwuda chiamaka calista says:

    NKWUDA CHIAMAKA CALISTA (external student)
    2016/233042
    calista5453@gmail.com
    ECONOMICS DEPARTMENT
    ECO 204
    MACROECONOMICS

    ASSIGNMENT
    QUESTION
    clearly discuss and analyze the Monetarist System and their tenets.

    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.
    A Rel-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.

  30. Avatar Ifesinachi Chidinma Ada says:

    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

  31. 1). When external dis-economies in production is present,private marginal cost will be lower than social marginal cost. external dis-economies of scale occurs when an industry growing in size causes negative externalities and rising long-run average costs. Alternatively,the competition for scarce resources may push up the cost of rent/labour/raw materials.
    External dis-economies in production is caused mainly because of the rise of undesirable by-product of a production process which causes over-prodution. Such un-wanted by-product are a natural consequences of many production processes.Thebsocial problems associated with external dis-economies arises when certain scarce resources are treated as if they were free goods because of fault specification of property rights, or because it is difficult to identify in some quantitative way who causes the nuisance or who suffers from it (or both), or because the administrative costs of solving the problems may be more costly than the nuisance itself.
    2). The government tries to combat market inequities through regulation, taxation, and subsidies. Government may also intervene in markets to promote general economics fairness. Maximizing social welfare is one of the most common and best understood reasons for government intervention. The primary means by which market failure can be corrected is through government intervention. This requires the government to pay legislation,such as entrust policies,and incorporate various price mechanisms,such as taxes and subsidies.
    3). It is more likely that services will be rationed let to longer waiting lists and some treatments not available. Government health care will require higher tax. Higher income tax may lead to lower incentives to work (though while taxes will rise,health insurance costs will be lower).

  32. Avatar EKECHUKWU IFEANYI PAUL 2019/249227 ECONOMICS EDUCATION says:

    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.

  33. Avatar Nancy okafor. (2019/245536) says:

    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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    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. 

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    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.

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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

  34. 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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    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.

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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

  35. Avatar Okegbe Udoka Jane 2018/249316 says:

    • 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.
    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.

    Although most modern economists reject the emphasis on money growth that monetarists purported in the past, some core tenets of the theory have become a mainstay in non monetarist analysis
    Monetarism is an economic theory that focuses on the macroeconomic effects of the supply of money and central banking. Formulated by Milton Friedman, it argues that excessive expansion of the money supply is inherently inflationary, and that monetary authorities should focus solely on maintaining price stability.
    This theory draws its roots from two historically antagonistic schools of thought: the hard money policies that dominated monetary thinking in the late 19th century, and the monetary theories of John Maynard Keynes, who, working in the inter-war period during the failure of the restored gold standard, proposed a demand-driven model for money. While Keynes had focused on the stability of a currency’s value, with panics based on an insufficient money supply leading to the use of an alternate currency and collapse of the monetary system, Friedman focused on price stability.
    The result was summarised in a historical analysis of monetary policy, Monetary History of the United States 1867–1960, which Friedman coauthored with Anna Schwartz. The book attributed inflation to excess money supply generated by a central bank. It attributed deflationary spirals to the reverse effect of a failure of a central bank to support the money supply during a liquidity crunch.
    Friedman originally proposed a fixed monetary rule, called Friedman’s k-percent rule, where the money supply would be automatically increased by a fixed percentage per year. Under this rule, there would be no leeway for the central reserve bank, as money supply increases could be determined “by a computer”, and business could anticipate all money supply changes. With other monetarists he believed that the active manipulation of the money supply or its growth rate is more likely to destabilise than stabilise the economy.

    REFERENCES
    Mankiw, N. Gregory. “Real Business Cycles: A New Keynesian Perspective”. Journal of Economic Perspectives 3.3 (1989): 79–90. Web.|date=October 2013

  36. Avatar Agha Uchenna 2019/244383 says:

    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.

  37. Avatar Oliaku Israel Okeoma 2015/203653 says:

    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.

  38. Avatar Orji Emeka Joseph 2015/200587 says:

    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.

  39. Avatar OKHUEIGBE CHARITY OMONYE says:

    THE MONETARIST MACRO ECONOMIC SYSTEM

    Milton Friedman an American economist is generally regarded as monetarism leading exponent.Friedman and other monetarists advocate a macroeconomic theory and policy that diverse significantly from those of the formerly dominant Keynesian school. The monetarist approach became influential during the 1970’s and early 80’s.

    Monetarism, a school of economic thought that maintains that the money supply, i.e, 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.

    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

    HOW THE MONETARIST SYSTEM WORKS
    As the availability of money in the economy increases aggregate demand for good 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 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 argued based on the quantity theory of money, that government should keep the money supply 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. He asserted that monetary policy should be done by targeting the growth rate of the money supply to maintain economic and price stability.
    Milton Friedman proposed a fixed growth at a constant annual rate tied to the growth of GDP and be expressed as a fixed % per year. This way the monetarist system 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 steady rate and inflation will be kept at low levels.Monetarists believe changes to money supply are the driver of the equations:
    MV=PQ
    where; M= money supply
    V= velocity(ready at which money changes hands)
    P= average price of goods and services
    Q= quantity of goods and services sold.
    change in M directly affected and determine employment, inflation(P) and production(Q).Monetarism builds on Keynesian theory by assuming the same monetarist economy frame work and integrating the equation of exchange, but instead focuses on the role played by money supply because they believe that v can be easily predicted.they believed that controlling an economy through fiscal policy is a poor decision because it necessary introduces micro economy distortions that reduce economic efficiency.

    There are potential dangers in monetarism
    Too much inflation and
    Too low inflation
    Too much inflation: was the reason why monetarism became important in the 1970’s in America. For instance; federal reserve making too much money available for the economy, prices will rise and inflation tends to distort the allocation of economic resources. In the process one can’t tend to know what price of good is going up and what price of good is going down. Because something is more or less valuable, what to do then is lower the rate of inflation and bring about more economic speedibility.
    Too low inflation : the rate of price inflation will be too low or deflation sets in which will lead to low aggregate demand.
    In a business cycle nominal wages are sticky; meaning that they cannot be readjusted or regenerated all the time. When the flow of purchasing power and flow of money declines it makes employers layoff some staffs which to business cycle downtime.
    REMEDIES
    constant rate of money supply growth
    constrain the central banks through rules and regulations

    CHARACTERISTICS OF MONETARISM
    The theoretical foundation is the quantity theory of money
    The economy is inherently stable. Markets work well when left to themselves. Government intervention can often time destabilize things more than they help.Laissez faire is often the best advice
    The fed should be bound to fixed rules in conducting monetary policy. They should not have discretion in conducting policy because they could make the economy worse off
    Fiscal policy is often bad policy.A small role for government is good.

    REFERENCES 
    Britannica, T. Editors of Encyclopaedia (2018, October 3). monetarism. Encyclopedia Britannica. https://www.britannica.com/topic/monetarism

    https://www.investopedia.com/terms/m/monetarism.asp

    Milton Friedman, A monetary history of the United States 1867-1960

    https://www.econweb.com.notes

    https://corporatefinanceinstitute.com/resources/knowledge/economics/monetarist-theory/

    https://www.youtube.com/redirect?event=video_description&redir_token=QUFFLUhqbDNjRlJrUzJrSklNNVh4d3J2QklyUnFLa0tQQXxBQ3Jtc0tubkxsY2pvNGo4Q0ZJWHY0X3ZpZEE3MmRKMVVjbng3VjlWT19hdmdkYzJNeTI4eXlvbXFHUF9UOGNxVkNCOVR6RmQzZEVKTkUzVzR5emdpUzVKUHpzcGFzUEZUc3kwWnFKZlpZSWNYS0hjczhtdF85OA&q=http%3A%2F%2Fbit.ly%2F2jp4Tpz

  40. Avatar Kalu Nmecha 2019/249570 says:

    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.

  41. Avatar Onyechukwu Blossom Chinyere 2019/242141 says:

    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

  42. Avatar Onyechukwu Blossom Chinyere 2019/242141 says:

    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

  43. Avatar Paul Emmanuel Okwuchukwu 2015/197559 says:

    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 non monetarist analysis
    Monetarism is an economic theory that focuses on the macroeconomic effects of the supply of money and central banking. Formulated by Milton Friedman, it argues that excessive expansion of the money supply is inherently inflationary, and that monetary authorities should focus solely on maintaining price stability.
    This theory draws its roots from two historically antagonistic schools of thought: the hard money policies that dominated monetary thinking in the late 19th century, and the monetary theories of John Maynard Keynes, who, working in the inter-war period during the failure of the restored gold standard, proposed a demand-driven model for money. While Keynes had focused on the stability of a currency’s value, with panics based on an insufficient money supply leading to the use of an alternate currency and collapse of the monetary system, Friedman focused on price stability.
    The result was summarised in a historical analysis of monetary policy, Monetary History of the United States 1867–1960, which Friedman coauthored with Anna Schwartz. The book attributed inflation to excess money supply generated by a central bank. It attributed deflationary spirals to the reverse effect of a failure of a central bank to support the money supply during a liquidity crunch.
    Friedman originally proposed a fixed monetary rule, called Friedman’s k-percent rule, where the money supply would be automatically increased by a fixed percentage per year. Under this rule, there would be no leeway for the central reserve bank, as money supply increases could be determined “by a computer”, and business could anticipate all money supply changes. With other monetarists he believed that the active manipulation of the money supply or its growth rate is more likely to destabilise than stabilise the economy.

    REFERENCES
    Mankiw, N. Gregory. “Real Business Cycles: A New Keynesian Perspective”. Journal of Economic Perspectives 3.3 (1989): 79–90. Web.|date=October 2013

    Bordo, Michael D. (1989). “The Contribution of A Monetury History”. Money, History, & International Finance: Essays in Honor of Anna J. Schwartz. The Increase in Reserve Requirements, 1936-37. University of Chicago Press. p. 46. CiteSeerX 10.1.1.736.9649. ISBN 0-226-06593-6. Retrieved 2019-07-25.

  44. Avatar Ogbaga stella chinwendu 2019/241733 says:

    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.

  45. Avatar Iheanacho Emmanuel Chinedu 2019/244463 Eco/ soc says:

    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

  46. Avatar Iheanacho Emmanuel Chinedu. 2019/244463 says:

    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

  47. It is said that the money you make is a symbol of value you create. In that view, I wouldn’t blame the monetarists for their strong belief on money being major determinant for economic stability and growth.
    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 (CFI, 2021).
    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 (DANIEL, ERIC &OSIKHOTSALI, 2021).
    Monetarism today is mainly associated with the work of Milton Friedman, who was the generation of economists to accept Keynesian economics and then criticise Keynes’s theory of fighting economic downturns using fiscal policy (government spending).
    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 Monetarism
    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.
    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 and it’s prospects
    According to Bennett T. McCallum, monetarism is a macroeconomic school of thought that emphasizes
    (1) long-run monetary neutrality,
    (2) short-run monetary nonneutrality,
    (3) the distinction between real and nominal interest rates, and
    (4) the role of monetary aggregates in policy analysis.
    (1) long-run monetary neutrality
    An economy possesses basic long-run monetary neutrality if an exogenous increase of Z percent in its stock of money would ultimately be followed, after all adjustments have taken place, by a Z percent increase in the general price level, with no effects on real variables (e.g., consumption, output, relative prices of individual commodities). While most economists believe that long-run neutrality is a feature of actual market economies, at least approximately, no other group of macroeconomists emphasizes this proposition as strongly as do monetarists. Also, some would object that, in practice, actual central banks almost never conduct policy so as to involve exogenous changes in the money supply. This objection is correct factually but irrelevant: the crucial matter is whether the supply and demand choices of households and businesses reflect concern only for the underlying quantities of goods and services that are consumed and produced. If they do, then the economy will have the property of longrun neutrality, and thus the above-described reaction to a hypothetical change in the money supply would occur.
    (2) short-run monetary nonneutrality
    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 (Bennett, N.D).
    (3) The distinction between real and nominal interest rates
    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.
    (4) The role of monetary aggregates in policy analysis.
    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.”
    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.
    Personal view on monetarism/conclusion
    Generally 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.
    On the other hand, I would say that neglecting other fiscal policy measures like taxes and it’s impact in times of inflation is biased because raising taxes is also a solution to high inflation.
    The idea of monetarism is wonderful but I think when we combine it monetary policy to fiscal policy we will have the best results.

    Reference
    Daniel R. , Eric E. & Osikhotsali M. Monetarism. Investopedia. July 25, 2021, https://www.investopedia.com/terms/m/monetarism.asp#:~:text=Monetarism%20is%20a%20macroeconomic%20theory,primary%20determinant%20of%20economic%20growth.
    Bennett T. Monetarism. Ecolib. N.D. https://www.econlib.org/library/Enc/Monetarism.html
    No name. Monetarist Theory. Corporate financial Institute(CFI). N.d. https://corporatefinanceinstitute.com/resources/knowledge/economics/monetarist-theory/

  48. Avatar OFORISHE VICTORIA IRUWOGHENE 2019/247251 says:

    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.

  49. Avatar Anyamadu Stephen Okechukwu 2019/249163 says:

    Understanding Monetarism and the Monetarist System.

    Monetarism is a macroeconomic theory which states that governments can foster economic stability by targeting the growth rate of the money supply. Essentially, it is a set of views based on the belief that the total amount of money in an economy is the primary determinant of economic growth ( by Investopedia ). It is also Monetarism is a school of thought in monetary economics that emphasizes the role of governments in controlling the amount of money in circulation ( by Wikipedia ).

    Monetarist – are those who argue for the monetarism.
    Monetarist as defined by oxford dictionary means an economist who is an advocate of monetarism.

    Monetarist system therefore a group of individual who believed or advocate in the structuring the economy in a way that is monetary policy is used in controlling inflation and unemployment, and making the economy stable. By monetary policy, it means the change in the supply of money by the central bank of a country for expansionary or contractionary motives. ( by researcher – Stephen Anyamadu )
    Monetarism is mainly associated Milton Friedman, Friedman and Anna Schwartz wrote an influential book – A Monetary History of the United States, 1867–1960, where they went accepted some monetary and fiscal policy theories by Keynesian economics and then criticise Keynes’s theory of fighting economic downturns using fiscal policy (government spending). Rather they argued that “inflation is always and everywhere a monetary phenomenon”.

    Though he ( Milton Friedman ) 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 (M) at a rate commensurate with the growth in productivity and demand for goods.
    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.

    Monetarism and Quantity Theory of Money

    Quantity theory of money is based upon an equation by American economist Irving Fisher.

    The Fisher equation is calculated as:

    M×V=P×T

    where:
    M=money supply
    V=velocity of money
    P=average price level
    T=volume of transactions in the economy


    Tenet of Monetarism

    There are several main points that the monetarist theory derives from the equation of exchange some of which are discussed below:

    — 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.

  50. Avatar Omeje christopher obinna 2019/245701 says:

    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

  51. Monetarism is a school of thought in monetary economics that emphasizes the role of governments in controlling the amount of money in circulation. Monetarist theory asserts that variations in the money supply have major influences on national output in the short run and on price levels over longer periods. Monetarists assert that the objectives of monetary policy are best met by targeting the growth rate of the money supply rather than by engaging in discretionary monetary policy. Monetarism is commonly associated with neoliberalism.
    Monetarism today is mainly associated with the work of Milton Friedman, who was among the generation of economists to accept Keynesian economics and then criticise Keynes’s theory of fighting economic downturns using fiscal policy (government spending). Friedman and Anna Schwartz wrote an influential book, A Monetary History of the United States, 1867–1960, and argued “inflation is always and everywhere a monetary phenomenon”.
    Though he opposed the existence of the Federal Reserve, Friedman advocated, given its existence, a central bank policy aimed at keeping the growth of the money supply at a rate commensurate with the growth in productivity and demand for goods.

    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.

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

    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.
    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.
    REFERENCES

    Phillip Cagan, 1987. “Monetarism”, The New Palgrave: A Dictionary of Economics, v. 3, Reprinted in John Eatwell et al. (1989), Money: The New Palgrave, pp. 195–205, 492–97.
    Harvey, David (2005). A Brief History of Neoliberalism. Oxford University Press. ISBN 978-0-19-928326-2.
    Friedman, Milton (2008). Monetary History of the United States, 1867-1960. Princeton University Press. ISBN 978-0691003542. OCLC 994352014

  52. Avatar Chisalum Emmanuel Chinecherem 2019/249408 says:

    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.
     

  53. Avatar ELIGWEDIRE VICTOR OZIOMA says:

    ELIGWEDIRE VICTOR OZIOMA
    2019/249216
    ECO 204
    ASSIGNMENT
    What is Monetarism?
    Monetarism is seen as a macro-economic concept, according to which government intervention in the economy in the form of the management of money supply is key to economic stability. The premise of monetarism lies in the idea that the total amount of money in circulation in an economy determines the rate of economic growth of that economy. In the long term, however, demand outstrips supply, which causes disequilibrium in the price markets and hence leads to 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). On this basis,
    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.
    American economist Milton Friedman is considered to be the pioneer of the school of economics called monetarism, which gained prominence around 1970s. Other proponents of the theory include Alan Walters, Allan Meltzer, Anna Schwartz, David Laidler, Karl Brunner, and Michael Parkin. They used the Quantity Theory of Money to conclude that the manner in which a government can allow the natural growth of an economy is by keeping the money supply fairly steady. 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 of the government – increasing government spending – is the key factor in stimulating an economy that is in a recession.
    Some key points highlighted by the theory are:
    ~ 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.

  54. Avatar OSAYANDE PROSPER OSARUMWENSE says:

    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

  55. Avatar MACHEBE CHIOMA STEPHANIE says:

    NAME: MACHEBE CHIOMA STEPHANIE
    REG NO: 2019/248922
    DEPT: ECONOMICS EDUCATION
    DISCUSS MONETARIST MACRO ECONOMIC
    SYSTEM
    Monetarism or monetarist macro economic system as it implies is a macro economic theory which states that government 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 amount of money in an economy is the primary determinant of economic growth.
    UNDERSTANDING THE MONETARY MACRO ECONOMIC SYSTEM
    Furthermore,let’s understand that monetarism is an economic school of thought which states that the supply of money in an economy is a 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 macro economic 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 Keynesian.
    •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 macro economic 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 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 expenditure in the economy. The formula is given as:
    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 ie 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 monetarist 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 & 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, variation in the money supply will affect price levels over the long term and economic output in short term.

  56. Avatar UDEH GODWIN ONYEKA says:

    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.

  57. Avatar OKECHUKWU TIMOTHY CHUKWUEZUGOLUM says:

    NAME: OKECHUKWU TIMOTHY CHUKWUEZUGOLUM
    REG. NO: 2019/244962
    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
    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. Inflation 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 deflation. Deflation 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 Depression. The Great Depression was a worldwide economic depression that took place from the late 1920s through the 1930s. For decades, debates went on about what caused the economic catastrophe, and economists remain split over a number of different schools of thought. of the 1930s on the Federal Reserve, arguing that the Fed tightened the money supply at the very moment that it should have been expanding it to stimulate economic growth.
    Given that central banks do exist, Friedman argued that monetary policy – the expansion or contraction of the money supply – is a much more effective tool for influencing the economy than fiscal policy – the government’s taxation and spending activities.
     
    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.

    REFERENCES
    R.E. Lucas and T.J. Sargent (1979) “After Keynesian Macroeconomics”, in After the Phillips Curve: Persistence of high inflation and high unemployment. Boston: Federal Reserve.
    A.H. Meltzer (1963) “The Demand for Money: The evidence from time series”, Journal of Political Economy, Vol. 71, p.219-46.
    L.W. Mints (1945) A History of Banking Theory. Chicago: University of Chicago Press.
    L.W. Mints (1950) Monetary Policy for a Competitive Society. New York: McGraw-Hill.
    F. Modigliani (1977) “The Monetarist Controversy: or should we forsake stabilization policies?”, American Economic Review, Vol. 67, p.1-19.
    D.T. Mortenson (1970) “A Theory of Wage and Employment Dynamics” in Phelps, 1970.
    D.T. Mortenson (1970) “Job Search, the Duration of Unemployment, and the Phillips Curve” in Phelps,1970.
    J. Muth (1961) “Rational Expectations and the Theory of Price Movements”, Econometrica, Vol. 29 (3), p.315-25.
    A.M. Okun (1962) “Potential GNP: Its measurement and significance”, in Proceedins of the Business and Economics Statistics Section, American Statistical Association. Washington, DC: American Statistical Association.
    A.M. Okun (1978) “Efficient Disinflationary Policies”, American Economic Review, Vol. 68 (2), p.348-52.
    A.M. Okun (1981) Prices and Quantities: A macroeconomicanalysis.Washington, DC: Brookings Institution.
    T.I. Palley (1992) “Milton Friedman and the Monetarist Counter-Revolution: A re-appraisal”, New School Working Paper, No. 38.
    D. Patinkin (1956) Money, Interest and Prices: An integration of monetary and value theory. 1965 edition, New York: Harper and Rowe

  58. Avatar Okafor chukwubuikem Emmanuel says:

    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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  59. Avatar Marcel ThankGod Tochukwu says:

    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.

  60. Avatar OKECHUKWU CHISOM PETER says:

    NAME: OKECHUKWU CHISOM PETER
    REG. NO: 2019/244670
    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
    The first is that the term ‘monetarist’ (like the term ‘Keynesian’) not only has no very precise meaning but has become part of the small change of political dispute. Indeed the two terms have become elements in a continuing but not notably constructive polemic so that both now carry political overtones which are liable to distort or obscure their meaning. Polemics have no place in a textbook. We must, as a result, try to offer a definition of ‘monetarism’ which is clear and, by virture of its clarity, free from polemical taints. Once this has been done (if indeed it can be done) we can cease to use the words ‘monetarism’ and ‘monetarist’ in anything but a precise way and concentrate on those propositions which, in our view, serve to define it.
    Unfortunately, setting out these propositions is far from straightforward since economists who are usually identified as ‘monetarist’ and who are happy enough to accept the identification do not have identical views. In what follows we have therefore sought to identify ‘monetarism’ with a minimum number of propositions which we believe ‘monetarists’ would typically accept. These propositions we define as ‘monetarist macroeconomic theory’ even though some ‘monetarists’ accept additional propositions which are equally at variance with our earlier analysis and equally important in their implications for policy.
    As we have seen, a macroeconomic theory must contain both a theory of aggregate demand and a theory of aggregate supply. Accordingly we begin with the ‘monetarist’ analysis of the former.
    Monetarism and aggregate demand.
    The three main economic propositions underlying the ‘monetarist” theory of aggregate demand are:
    1. The nominal money stock (M5 ) – however narrowly or broadly defined – is a variable subject to control by the monetary authorities. This is the central bank, itself subject to control by the government.
    2. The demand for money (in real terms) is a stable function of a small number of variables and is homogeneous of degree zero in prices (i.e. is unaffected by the price level).
    3. Causation runs primarily from the nominal money stock (M5 ) – as this is set by the central bank – to money expenditures. The first of these propositions we have already met in Chapter 16, at least by implication, since there we treated the nominal money supply as an exogenous variable. We are now marginally expanding the meaning of this assumption by asserting that the nominal money stock (not the real money stock) can be set by the central bank. Precisely why this is theoretically plausible will emerge when, later, we turn to discuss the theory of the supply of money. For the present, the reader is asked to take its plausibility on trust.
    Aggregate demand in nominal terms is now explained in ‘monetarist’ theory by arguing that it will be determined by: (a) the nominal money stock (M5 ), which is set by the central bank (b) the actions of transactors which equate MD to M5 by adjusting the value of nominal aggregate demand.

    REFERENCES
    R.J. Gordon (1972) “Wage-Price Controls and the Shifting Phillips Curve”, Brookings Papers on Economic Activity, 3, p.385-421.
    R.J. Gordon (1974), editor, Milton Friedman’s Moneatry Framework: A debate with his critics. Chicago: University of Chicago Press.
    R.J. Gordon (1975) “The Impact of Aggregate Demand on Prices”, Brookings Papers on Economics Activity, 3, p.613-62.
    J.M. Grandmont and Y. Younè³ (1973) “On the Efficiency of a Monetary Equilibrium”, Review of Economic Studies, Vol. 40 (2), p.149-65.
    C.W.J. Granger (1969) “Investigating Causal Relations by Econometric Models and Cross-Spectral Methods”, Econometrica, Vol. 37, p.424-38.
    J.G. Gurley and E.S. Shaw (1960) Money in a Theory of Finance. Washington, DC: Brookings Institution.
    F.H. Hahn (1971) “Professor Friedman’s Views on Money”, Economica, Vol. 38, p.61-80.
    F.H. Hahn (1980) “Monetarism and Economic Theory”, Economica, Vol. 47, p.1-17.
    F.H. Hahn (1984) “Why I am not a Monetarist” in Equilibrium and Macroeconomics. Cambridge, Mass: M.I.T. Press.
    A.G. Hart (1935) “The Chicago Plan of Banking Reform”, Review of Economic Studies, Vol. 2, p.104-16.
    F.A. Hayek (1943) “A Commodity Reserve Currency”, Economic Journal, Vol. ??, p.176-84.
    F.A. Hayek (1978) Denationalization of Money: The argument refined. London: Institute of Economic Affairs.
    F.A. Hayek (1979) “Toward a Free-Market Monetary System”, Journal of Libertarian Studies, Vol. 3 (1), p.1-8.
    D. Hendry and N. Ericsson (1991) “An Econometric Analysis of UK Money Demand in Monetary Trends in the United States and the United Kingdom”, American Economic Review, Vol. 81, p.8-38.
    J. Hicks. (1935) “A Suggestion for Simplifying the Theory of Money”, Economica, Vol. 2 (1), p.1-19.
    J. Hicks (1937) “Mr Keynes and the Classics: A suggested interpretation”, Econometrica, Vol. 5, p.147-59.
    A. Hirsch and N. de Marchi (1986) “Making a Case when Theory is Unfalsifiable: Friedman’s Monetary History”, Economics and Philosophy, Vol. 2, p.1-21.
    J. Johannes and R. Rasche (1987) Controlling Growth of Monetary Aggregates. The Hague: Kluwer-Nijhoff.
    H.G. Johnson (1971) “The Keynesian Revolution and the Monetarist Counter-Revolution”, American Economic Review, Vol. 2, p.1-14.
    J.P. Judd and J.L. Scadding (1982) “The Search for a Stable Money Demand Function: A survey of the post-1973 literature”, Journal of Economic Literature, Vol. 20, p.993-1023.
    N. Kaldor (1960) “The Radcliffe Report”, Review of Economics and Statistics, ???
    N. Kaldor (1970) “The New Monetarism”, Lloyds Bank Review, July, p.1-18.
    N. Kaldor (1980) Origins of the New Monetarism. Cardiff: University of Cardiff Press.
    N. Kaldor (1982) The Scourge of Monetarism. Oxford: Oxford University Press.
    J.H. Kareken and R.M. Solow (1963) “Lags in Monetary Policy”, in Commission on Money and Credit, Stabilization Policy, Englewood Cliffs, NJ: Prentice-Hall.
    H.G. Johnson (1971) “The Keynesian Revolution and the Monetarist Counter-Revolution”, American Economic Review, Vol. 2, p.1-14.
    D. Laidler (1966) “The Rate of Interest and the Demand for Money: Some empirical evidence”, Journal of Political Economy, Vol. 74, p.545-55.
    D. Laidler (1973) “The Influence of Money on Real Income and Inflation: A simple model with some empirical tests for the United States, 1953-72”, Manchester School of Economic and Social Studies, Vol. 41, p.367-95.
    D. Laidler (1977) The Demand for Money: Theories, evidence and problems. 1985 edition, New York: Harper and Row.
    D. Laidler (1982) Monetarist Perspectives. Cambridge, Mass: Harvard University Press.

    • Avatar OKECHUKWU TIMOTHY CHUKWUEZUGOLUM says:

      NAME: OKECHUKWU TIMOTHY CHUKWUEZUGOLUM
      REG. NO: 2019/244962
      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
      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. Inflation 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 deflation. Deflation 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 Depression. The Great Depression was a worldwide economic depression that took place from the late 1920s through the 1930s. For decades, debates went on about what caused the economic catastrophe, and economists remain split over a number of different schools of thought. of the 1930s on the Federal Reserve, arguing that the Fed tightened the money supply at the very moment that it should have been expanding it to stimulate economic growth.
      Given that central banks do exist, Friedman argued that monetary policy – the expansion or contraction of the money supply – is a much more effective tool for influencing the economy than fiscal policy – the government’s taxation and spending activities.
       
      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.

      REFERENCES
      R.E. Lucas and T.J. Sargent (1979) “After Keynesian Macroeconomics”, in After the Phillips Curve: Persistence of high inflation and high unemployment. Boston: Federal Reserve.
      A.H. Meltzer (1963) “The Demand for Money: The evidence from time series”, Journal of Political Economy, Vol. 71, p.219-46.
      L.W. Mints (1945) A History of Banking Theory. Chicago: University of Chicago Press.
      L.W. Mints (1950) Monetary Policy for a Competitive Society. New York: McGraw-Hill.
      F. Modigliani (1977) “The Monetarist Controversy: or should we forsake stabilization policies?”, American Economic Review, Vol. 67, p.1-19.
      D.T. Mortenson (1970) “A Theory of Wage and Employment Dynamics” in Phelps, 1970.
      D.T. Mortenson (1970) “Job Search, the Duration of Unemployment, and the Phillips Curve” in Phelps,1970.
      J. Muth (1961) “Rational Expectations and the Theory of Price Movements”, Econometrica, Vol. 29 (3), p.315-25.
      A.M. Okun (1962) “Potential GNP: Its measurement and significance”, in Proceedins of the Business and Economics Statistics Section, American Statistical Association. Washington, DC: American Statistical Association.
      A.M. Okun (1978) “Efficient Disinflationary Policies”, American Economic Review, Vol. 68 (2), p.348-52.
      A.M. Okun (1981) Prices and Quantities: A macroeconomicanalysis.Washington, DC: Brookings Institution.
      T.I. Palley (1992) “Milton Friedman and the Monetarist Counter-Revolution: A re-appraisal”, New School Working Paper, No. 38.
      D. Patinkin (1956) Money, Interest and Prices: An integration of monetary and value theory. 1965 edition, New York: Harper and Rowe

  61. Avatar Joseph Prosper Chizundu 2019/247776 says:

    Monetarism And The Monetarist System
    Monetarism: Monetarism is an economic theory that says the money supply is the most important driver of economic growth. As the money supply increases, people demand more. Factories produce more, creating new jobs.
    Monetarists (believers of the monetarism theory) warn that increasing the money supply only provides a temporary boost to economic growth and job creation. Over the long run, increasing the money supply increases inflation. As demand outstrips supply, prices will rise to match.
    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. 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.
    A change in money supply affects full employment, price levels etc. Monetarism is associated with Friedman and Anna J. Schwartz, with Friedman tagged the father of monetarism. 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.
    Reference: https://www.investopedia.com/terms/m/monetarism.asp

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

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

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

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

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

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

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

    3: The reserve ratio: The percentage of reserves a bank is required to hold against deposits. A decrease in the ratio enables banks to lend more, thereby increasing the supply of money.
    The discount rate: The interest rate the Fed charges commercial banks that need to borrow additional reserves. A drop in the discount rate will encourage a bank to borrow more from the Fed and therefore lend more to its customers.
    Open market operations: Open market operations consist of buying and selling government securities. Buying securities from large banks increases the supply of money, while selling securities contracts decreases the money supply in the economy.
    FRIED’S FREE MARKET THINKING
    a: Friedman argued for free trade
    b: small government
    c: And a slow steady increase of the money supply in a growing economy.
    Monetarist say that central bank are more powerful than the government because:
    1: They control the money supply
    2: They also tend to watch real interest rates rather than normal rates. Most published rates are norminal rates, while real rates remove the effect of inflation.
    3: Real rates give a truer picture of the cost of money.

    Reference: Kimberly Amadeo,Thomas J.catalano, Millton Friedman, Bennett mcCullum

  63. Avatar GUTON DAMILOLA MAUTON says:

    NAME: GUTON DAMILOLA MAUTON
    REG. NO: 2019/245651
    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
    Monetarist theory, or monetarism, is an approach to economics that centers on the money supply (the amount of money in circulation, including not just coins and bills but also bank-account balances). The basic idea behind monetarist thinking is that the size of the money supply is more important than any other factor affecting the economy.
    In the 1970s governments guided by the then-dominant school of economic thought, Keynesian economics (based on the writings of British economist John Maynard Keynes), were battling high inflation (the rising of prices across the economy that causes money to lose value) and conditions of economic stagnation. Monetarists, led by American economist Milton Friedman, maintained that the Keynesian approach was flawed and that inflation could be brought under control by restraining the growth of the money supply. Under the influence of monetarist theory, the United States’ central bank, the Federal Reserve System (commonly called the Fed), was successful at reining in inflation, and in the 1980s economists and government leaders accordingly embraced the school of thought in large numbers. But subsequent changes in the economy seemed to disprove an exclusive focus on the money supply, and the doctrine’s influence waned. Although monetarism remained influential into the twenty-first century, it was in a modified form that took other variables besides the money supply into consideration.
    When Did It Begin
    Monetarist theory arose in reaction to Keynesian theory, the mainstream school of economics in the United States from the 1930s to the 1970s, which was based on the ideas of the British economist John Maynard Keynes. Keynes had provided a blueprint for recovery from the Great Depression (the severe crisis affecting the world economy in the 1930s), suggesting that governments could stimulate their ailing economies by cutting taxes and spending money, even if they had to go into debt. The money they spent (on public projects and on aid to the poor, the unemployed, and the elderly, for instance) would put money in people’s pockets so that they would be able to buy the products they needed and wanted. This increased consumer demand would give companies an incentive to expand their operations and hire new workers, which would increase demand still further. The United States and other countries did, in fact, pursue such policies, and their recovery from the Depression seemed to validate Keynes’s theories. Keynesian economics continued to dominate in academia and government in the following decades, as governments generally attempted to promote economic stability through tax and spending policies.
    The founder and most prominent proponent of monetarism, American economist Milton Friedman, emerged as an opponent of this approach in the 1950s. Friedman’s views were at first seen as extreme, but they began to gain the attention of prominent economists with the publication of A Monetary History of the United States 1867-1960 (1963). In this book Friedman and coauthor Anna J. Schwartz analyzed the role of the money supply in U.S. history, arguing that it was the most important factor in the country’s economic fluctuations. Friedman further believed that Keynesian attempts to fine-tune the economy through tax and spending policy did more harm than good. He believed that governments could play a role in stabilizing the economy but that the only effective tool they had for doing so was monetary policy (control over the money supply). Friedman predicted that Keynesian economic policies could eventually lead to an unprecedented situation in which inflation (the general rising of prices, which causes money to lose value) and unemployment (the percentage of people who want to work but cannot find jobs) could both rise at the same time. When this phenomena, which became known as stagflation (a combination of economic stagnation and inflation), occurred during the 1970s, economists and government leaders turned away from Keynesianism and toward Friedman and monetarist theory.
    The theoretical basis for monetarism is a mathematical equation known as the equation of exchange: MV=PQ. M, in this equation, represents the money supply, and V represents the velocity of money, or the rate at which the basic unit of currency (such as a dollar) changes hands. P stands for the level of prices in the economy, and Q for the quantity of goods and services in the economy. In other words, the left side of the equation accounts for all of the money circulating in the economy and for the speed at which it is circulating, and the right side of the equation accounts for the entire output of the economy (the price of all goods and services multiplied by the quantity of those goods and services).
    Monetarists use this equation to argue that as M increases (if V remains constant), then either P or Q will increase. It follows, then, that the size of the money supply has a direct relationship to both prices and production and also to employment, since the number of people who have jobs will vary according to how much companies are producing and how much money they can charge for the items they are producing.
    P, or prices, is a particularly important factor, since inflation poses one of the most persistent threats to any economy. Though inflation is a natural part of the economy, if it gets out of hand, the level of wages that people bring in will be insufficient to pay for their needs and wants, and they will be likely to demand higher wages. This can force inflation still higher (since companies will likely compensate for the increased wages they are paying workers by raising the prices of their goods) without solving the basic problem, and the devaluation of money continues.
    According to monetarist theory, inflation is always caused by there being too much money in circulation. Money, like other products for sale in the economy, is subject to the forces of supply and demand. When there is too much money in circulation, the demand for money is low, and it loses value. When there is not enough money in circulation, the demand for money is high, and it gains value.
    Monetarists believe that if a government’s central bank can keep the supply and demand for money balanced, then inflation can be controlled. A central bank could theoretically do this by setting a strict rate of increase in the size of the money supply relative to Gross Domestic Product (GDP), a figure that represents the total value of all the goods and services produced in the economy. In other words, as the amount and value of the products generated by the economy increases, the money supply should increase proportionately. If this happens, then inflation will remain low.
    Monetarists argue that whereas the effect of the money supply on the economy is direct and verifiable, the effects of fiscal policy (government spending and tax programs) are much less controllable. Monetary policy can reliably be counted on to have specific economic effects, but fiscal policy is inefficient, and it creates more problems than solutions. Monetarists argued, therefore, that governments should stop trying to manage the economy through fiscal policy and adopt, instead, a strictly monetary approach.

    REFERENCES
    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.
    J.W. Angell (1933) “Monetary Control and General Business Stabilization”, in Economic Essays in Honor of Gustav Cassel. London: Allen and Unwin.
    J.W. Angell (1936) The Behavior of Money. New York: McGraw-Hill.
    G.C. Archibald (1969) “The Philips Curve and the Distribution of Unemployment”, American Economic Review, Vol. 59 (2), p.124-9.
    M.J. Bailey (1956) “The Welfare Cost of Inflationary Finance”, Journal of Political Economy, Vol. 64, p.93-110.
    T.F. Bewley (1980) “The Optimum Quantity of Money”, in J.H. Kareken and N. Wallace, Models of Monetary Economies, Minneapolis: Federal Reserve of Minneapolis.
    T.F. Bewley (1983) “A Difficulty with the Optimum Quantity of Money”, Econometrica, Vol. 51, p.1485-1504.
    K. Brunner (1968) “The Role of Money and Monetary Policy”, Federal Reserve Bank of St Louis Review, Vol. 50, p.8-24.
    K. Brunner (1970) “The Monetarist Revolution in Monetary Theory”, Weltwirtschaftliches Archiv, Vol. 105 (1), p.1-30.
    K. Brunner (1981) “Controlling Monetary Aggregates”, in Federal Reserve Bank of Boston, Controlling Monetary Aggregates III, p.1-65.
    K. Brunner and A.H. Meltzer (1963) “Predicting Velocity: Implications for theory and policy”, Journal of Finance, Vol. 18, p.319-54.

  64. Avatar Ugah Chikaodili Udodili says:

    NAME:Ugah Chikaodili Udodili
    Reg number: 2019/243002
    Economics

    The term Monetary arrangement alludes to what the central bank, the country’s national bank, does to impact how much cash and credit in the Nigerian economy. Cash and credit influences loan fee and the exhibition of the economy (cost of credit).

    Economies has shown the connection between cash supply and monetary development. The cash supply straightforwardly impacts monetary development and achieves security. This implies a sensible expansion in cash supply will prompt monetary development.

    The macroeconomic money related approach is a standard instrument, that the public authority uses to control total interest of labor and products. Per say, an increment in total interest for labor and products will prompt expansion in business and decreases in compulsory joblessness which will result to higher usefulness in the economy.

    The national administration of Nigeria applies the financial arrangement in this way, through the approach to correcting of loan cost, for instance the central government can choose to increment or decline loan fee through the assistance of the Central Bank of Nigeria. This will impact this will impact individual negligible affinity to consume and the impact of the multiplier.

    The multiplier is a powerful power which extensively alludes to a monetary element that, when expanded or changed, causes increments or changes in numerous other related financial factors. The term multiplier is generally utilized concerning the connection between government spending and all out public pay.
    In a circumstance when national government chooses to build loan cost, this will have an immediate impact in the degree of saving and the interest of cash within reach. This implies an expansion rate will energize setting aside and deter cash nearby the other way around.

    Monetarism is profoundly connected with a financial expert called Milton Friedman who propounded the hypothesis, of amount hypothesis of cash. He recommended that the public authority ought to apply this hypothesis by keeping the inventory of cash genuinely consistent, expanding it marginally to empower regular financial development.

    Expansion is brought about by unreasonable stock of cash on the grounds that large chunk of change will pursue less merchandise. Friedman proposed a proper development rate called the k percent rule. This standard gave the rule that cash supply ought to develop at a yearly rate connected with an ostensible GDP that express at a decent rate each year. The k percent rule will be sufficient in aiding breaking down and arranging of the economy for both the private and public area.

    Straightforwardly to monetarism is the amount hypothesis of cash which embraced and drafted into the overall ​Keynesian system of macroeconomics. This hypothesis can be communicated in condition which is cash provided x speed of cash which is likewise the pace of cash change hand is equivalent to the normal costs of labor and products x result which is amount of labor and products. The condition was formed by John Stewart given as:

    MV=PQ

    M = supply of cash

    V= speed

    P= normal cost of labor and products

    Q= public income absolute amount of merchandise size administrations provided

    The condition is connected because of the adjustment of supply of cash either increment or diminishing with lead to an adjustment of the normal of cost of labor and products or public pay.

    All together financial strategy can’t be overemphasized yet stays significant and the vital to the public authority utilizes in settling the economy and achieves monetary development.

  65. Avatar Machebe Chioma Stephanie says:

    Name: Machebe Chioma Stephanie
    Reg No: 2019/248922
    Dept: Economics education

    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 thenvery 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 spoused 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.

  66. Avatar OKOYE STELLA OGOCHUKWU 2019/250026 says:

    OKOYE STELLA OGOCHUKWU
    2019/250026
    ECONOMICS(MAJOR)
    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
    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 MACRO ECONOMY
    • 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

  67. Avatar Chukwubuikem Chinaza Joy says:

    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.
    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.
    Monetarist (believers of the monetarism theory warn that increasing the money supply only provide 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.
    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 experience this slows economic growth.
    Their tenets are:
    . A federal jobs guarantee program is possible: the core tenet that the government can create more money. The monetarist theorists support the idea of a federal job guarantee as a way to stabilize the economy and put money toward human capital.
    . 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).

    Registration number: 2019/242315
    Faculty: Education
    Department: Library and information science.

  68. Avatar Okafor Roseline Chugo 2019/248202 says:

    DISCUSS MONETARIST MACRO-ECONOMIC SYSTEM
    The monetarist macro economic system is also called the monetarist theory, or monetarism. This is an approach to economics that centers on the money supply (the amount of money in circulation, including not just coins and bills but also bank-account balances). The basic idea behind monetarist thinking is that the size of the money supply is more important than any other factor affecting the economy. It 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.
    They believe that when interest rates are increased, people have more of an incentive to save than to spend, thereby reducing or contracting the money supply but as the money supply increases, people demand more. Factories produce more, creating new jobs.
    Monetarists warn that increasing the money supply only provides a temporary boost to economic growth and job creation. Over the long run, increasing the money supply increases inflation. As demand outstrips supply, prices will rise to match.
    The theory of monetarism was popularized by Milton Friedman 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.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, 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.
    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 statistics.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 then, 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.
    Monetary policy, an economic tool used in monetarism, is implemented to adjust interest rates that, in turn, control the money supply. When interest rates are increased, people have more of an incentive to save than to spend, thereby reducing or contracting the money supply. Contrarily, when interest rates are lowered following an expansionary monetary scheme, the cost of borrowing decreases, which means people can borrow more and spend more, thereby stimulating the economy.

    The Quantity Theory of Money
    Central to monetarism is the “quantity theory of money,” which monetarists adopted from earlier economic theories and integrated into the general Keynesian framework of macroeconomics. The quantity theory of money can be summarized in the equation of exchange, formulated by John Stuart Mill, which states that the money supply, multiplied by the rate at which money is spent per year, equals the nominal expenditures in the economy. The formula is given as:
    MV=PQ
    where:
    M=money supply
    V=velocity (rate at which money changes hands)
    P=average price of a good or service
    Q=quantity of goods and services sold
    In other words, the left side of the equation accounts for all of the money circulating in the economy and for the speed at which it is circulating, and the right side of the equation accounts for the entire output of the economy (the price of all goods and services multiplied by the quantity of those goods and services).
    Monetarists use this equation to argue that as M increases (if V remains constant), then either P or Q will increase. It follows, then, that the size of the money supply has a direct relationship to both prices and production and also to employment, since the number of people who have jobs will vary according to how much companies are producing and how much money they can charge for the items they are producing.
    P, or prices, is a particularly important factor, since inflation poses one of the most persistent threats to any economy. Though inflation is a natural part of the economy, if it gets out of hand, the level of wages that people bring in will be insufficient to pay for their needs and wants, and they will be likely to demand higher wages. This can force inflation still higher (since companies will likely compensate for the increased wages they are paying workers by raising the prices of their goods) without solving the basic problem, and the devaluation of money continues.

  69. Avatar MACHEBE CHIOMA STEPHANIE says:

    NAME: MACHEBE CHIOMA STEPHANIE
    REG NO:2019/248922
    DEPT: SOCIAL SCIENCE EDUCATION (ECONOMIC EDUCATION)

    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.

  70. Avatar OKECHI PASCHAL MAKUO. REG NO:2019/247596 says:

    DEPARTMENT: LIBRARY AND INFORMATION SCIENCE
    FACULTY OF EDUCATION

    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 is the control of the quantity of money available in an economy and the channels by which new money is supplied.By managing the money supply, a central bank aims to influence macroeconomic factors including inflation, the rate of consumption, economic growth, and overall liquidity.
    In addition to modifying the interest rate, a central bank may buy or sell government bonds, regulate foreign exchange (forex) rates, and revise the amount of cash that the banks are required to maintain as reserves.
    Economists, analysts, and investors eagerly await monetary policy decisions and even the minutes of meetings in which they are discussed. This is news that has a long-lasting impact on the overall economy as well as on specific industry sectors and markets.
    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.
    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.
    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.

  71. Avatar MACHEBE CHIOMA STEPHANIE says:

    NAME: MACHEBE CHIOMA STEPHANIE
    REG NO:2019/248922
    DEPT: SOCIAL SCIENCE EDUCATION (ECONOMIC EDUCATION)

    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.

  72. Avatar Oguzie Echezonachukwu Sixtus says:

    Name: Oguzie Echezonachukwu Sixtus
    Registration Number: 2019/249165
    Department: Economics
    Date: 13-02-22

    “The Monetarist System” and their Tenets:
    Monetarism is an economic view that attributes economic fluctuations to changes in the money supply. Monetarism is an economic school of thought which states that the supply of money in an economy is the primary driver of economic growth. As the availability of money in the system increases, aggregate demand for goods and services goes up. An increase in aggregate demand encourages job creation, which reduces the rate of unemployment and stimulates economic growth. Monetary policy, an economic tool used in monetarism, is implemented to adjust interest rates that, in turn, control the money supply. When interest rates are increased, people have more of an incentive to save than to spend, thereby reducing or contracting the money supply. Contrarily, when interest rates are lowered following an expansionary monetary scheme, the cost of borrowing decreases, which means people can borrow more and spend more, thereby stimulating the economy.
    The theory is not nearly as confusing as it may first appear. The theory basically says that prices for goods and services, as well as the rate at which prices rise (called inflation), are based upon how much money is in the economy and how fast that supply of money is increasing. If the supply of money increases quickly enough, prices will increase as the supply of money outpaces the supply of goods and services provided in the economy. Why?
    When people have excess money, they have two options: save or spend. If people decide to buy more stuff, they are competing with other people that are also trying to buy more stuff. Remember that the injection of more money in the economy does not mean that the quantity of goods and services has increased. Consequently, as consumers compete for the limited amount of goods and services available in an economy, the price of goods increases, leading to inflation.
    The same thing will happen if you decide to save instead of buy. If you save your money, you’ll usually, like most people, park the money in a bank. The banks make money by loaning money. Since they have more money to lend out, they will do it. The people who borrow money go out and compete with other buyers, which of course increases the price of goods and services because the quantity of goods and services in the economy has not changed just because the money supply has increased.
    When do rising prices stabilize? As prices increase, you need more money to purchase goods and services. Eventually, the money demanded by consumers to purchase stuff will equal the quantity of money supplied. This is called the equilibrium price, and it is where supply equals demand. In order to avoid inflation, monetarists argue that the rate of growth in the money supply must not exceed the growth rate of the economy in the long run.
    Monetarists believe monetary policy is more effective than fiscal policy (government spending and tax policy). Stimulus spending adds to the money supply, but it creates a deficit adding to a country’s sovereign debt. That could increase interest rates.
    The quantity theory is the basis for several key tenets and prescriptions of monetarism:
    1. Long-run monetary neutrality: Long-run neutrality of money is defined here to imply a long-run independence of real variables from the money supply. It is a consensus view that money is unlikely to be neutral in the short run because the sources of non neutrality (e.g. sticky prices) are more effective in the short run.
    2. Short-run monetary non neutrality: An increase in the stock of money has temporary effects on the National Output and employment in the short run because wages and prices take time to align.
    3. Constant money growth rule: Friedman, who died in 2006, proposed a fixed monetary rule, which states that the Fed should be required to target the growth rate of money to equal the growth rate of real GDP, leaving the price level unchanged. If the economy is expected to grow at 2 percent in a given year, the Fed should allow the money supply to
    increase by 2 percent. The Fed should be bound to fixed rules in conducting monetary policy because discretionary power can destabilize the economy.
    4. Interest rate flexibility: The money growth rule was intended to allow interest rates, which affect the cost of credit, to be flexible to enable borrowers and lenders to take account of expected inflation as well as the variations in real interest rates.

  73. Avatar Ogili Edmond Onyedikachi says:

    Name: Ogili Edmond Onyedikachi
    Registration Number: 2019/244358
    Department: Economics/Philosophy
    Monetarist System and their Tenets:
    Monetarism is closely associated with economist Milton Friedman, who argued, based on the quantity theory of money, that the government should keep the money supply fairly steady, expanding it slightly each year to allow for the natural growth of the economy. Due to the inflationary effects that can be brought about by the excessive expansion of the money supply, Friedman, who formulated the theory of monetarism, asserted that monetary policy should be done by targeting the growth rate of the money supply to maintain economic and price stability.
    In his book, A Monetary History of the United States 1867–1960, Friedman proposed a fixed growth rate called the K-percent rule, suggesting that money supply should grow at a constant annual rate tied to the growth of nominal gross domestic product (GDP) and be expressed as a fixed percentage per year. This way, the money supply will be expected to grow moderately, businesses will be able to anticipate the changes to the money supply every year and plan accordingly, the economy will grow at a steady rate, and inflation will be kept at low levels.
    In general, monetary policy can be characterized as contractionary or expansionary. Contractionary monetary policy is when the Fed reduces inflation by raising the federal funds rate or decreasing the money supply. Expansionary monetary policy works by expanding the money supply faster than usual or lowering short-term interest rates.
    Milton Friedman popularized the theory of monetarism in his 1967 address to the American Economic Association. He said that the antidote to inflation was higher interest rates, which in turn reduces the money supply. Prices then fall as people would have less money to spend.
    Milton also warned against increasing the money supply too fast, which would be counter-productive by creating inflation. But a gradual increase is necessary to prevent higher unemployment rates.
    
    The belief is that if the Fed were to properly manage the money supply and inflation, it would theoretically create a Goldilocks economy, where low unemployment and an acceptable level of inflation are prevalent.
    Friedman (and others) blamed the Fed for the Great Depression. As the value of the dollar fell, the Fed tightened the money supply when it should have loosened it. They raised interest rates to defend the value of the dollar as people redeemed their paper currency for gold. Money supply dwindled, and loans became harder to get. The recession then worsened into a depression.
    Monetarists believe monetary policy is more effective than fiscal policy (government spending and tax policy). Stimulus spending adds to the money supply, but it creates a deficit adding to a country’s sovereign debt. That could increase interest rates.
    Monetarists also believe that, as their name suggests, the money supply is what regulates the economy. They see that managing money inventory directly impacts swelling and that by limiting money inventory, they may reduce future financing expenses. Monetarists believe that because the velocity of money is steady, raising the money supply will raise prices and real GDP in the near run.
    Central to monetarism is the “quantity theory of money,” which monetarists adopted from earlier economic theories and integrated into the general Keynesian framework of macroeconomics. The quantity theory of money can be summarized in the equation of exchange, formulated by John Stuart Mill, which states that the money supply, multiplied by the rate at which money is spent per year, equals the nominal expenditures in the economy. The formula is given as:​
    MV = PQ
    where:
    M=money supply
    V=velocity (rate at which money changes hands)
    P=average price of a good or service
    Q=quantity of goods and services sold
    TENETS OF THE MONETARIST SYSTEM:
    • Long-run monetary neutrality: An increase in the money stock would be followed by an increase in the general price level in the long run, with no effects on real factors such as consumption or output.­
    • Short-run monetary non neutrality: An increase in the stock of money has temporary effects on real output (GDP) and employment in the short run because wages and prices take time to adjust (they are sticky, in economic parlance).­
    • Constant money growth rule: Friedman, who died in 2006, proposed a fixed monetary rule, which states that the Fed should be required to target the growth rate of money to equal the growth rate of real GDP, leaving the price level unchanged. If the economy is expected to grow at 2 percent in a given year, the Fed should allow the money supply to increase by 2 percent. The Fed should be bound to fixed rules in conducting monetary policy because discretionary power can destabilize the economy.­
    • Interest rate flexibility: The money growth rule was intended to allow interest rates, which affect the cost of credit, to be flexible to enable borrowers and lenders to take account of expected inflation as well as the variations in real interest rates.­


    

  74. Avatar Nduul Michael Terungwa says:

    Nduul Michael Terungwa
    2019/246514
    Averiorbo@gmail.com

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

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

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

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

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

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

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

  75. Avatar Ihechukwu+Chukwuebuka+Manasseh+2018/251195 says:

    In the rise of monetarism as an ideology, two specific economists were critical contributors. Clark Warburton, in 1945, has been identified as the first thinker to draft an empirically sound argument in favour of monetarism. This was taken more mainstream by Milton Friedman in 1956 in a restatement of the quantity theory of money. The basic premise these two economists were putting forward is that the supply of money and the role of central banking play a critical role in macroeconomics.
    The theory/ideology was popularized by Milton Friedman, in his 1967 address to the American Economic Association. Where he said that the solution to inflation was higher interest rates, which in turn reduces the money supply. Prices then fall as people would have less money to spend.
    Theoretically, subscribers to the theory believe that money supply is a primary determinant of price levels and inflation. When the money supply is expanded, individuals will be induced to higher spending, and inevitably leading to higher prices and inflation. In turn, when the money supply reduces, individuals would limit their budgetary spending accordingly, and leading to deflation and risks, causing a recession.
    Monetarism began to deviate more from Keynesian economics however in the 70’s and 80’s, as active implementation and historical reflection began to generate more evidence for the monetarist view. In 1979 for example, Jimmy Carter appointed Paul Volcker as Chief of the Federal Reserve, who in turn utilized the monetarist perspective to control inflation. He eventually created a price stability, providing evidence that the theory was sound. In addition, Milton Friedman and Ann Schwartz analyzed the Great Depression in the context of monetarism as well, identifying a shortage of the money supply as a critical component of the recession.
    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 the 1967 speech at the American Economic Association as stated above. 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.
    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 Nigeria, the CBN can change the CBN Funds Rate – the interest rate at which banks can lend money overnight to other banks. The CBN funds rate affects all other interest rates in the economy. When the CBN 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:
    M × V = P × Q
    Where:
    M is the money supply, V is the velocity of money (the rate of turnover at which a single unit of currency – e.g., one dollar – is spent in one year), P is the average price level for transactions in the economy (the purchase of goods and services), Q is the total quantity of goods and services produced – i.e., economic output or production.
    To explain this formula, let’s assume that the economy’s output comes from one producer. Let’s say a manufacturer produces 100 units and sells them at ₦200. So, in other words, the nominal GDP is ₦10,000 (100units x ₦200).Say, the central bank supplies ₦500 in the economy. Thus, the money supply will change hands 20 times (₦10,000 / ₦500) to purchase the same item.
    Furthermore, the central bank increased the money supply to ₦1,000. Assume that the velocity of money is fixed (20 times) and that real output is stagnant (100 units). Thus, it will push up the price from ₦200 to ₦2,000 (20x ₦1,000 / 100).
    According to the monetarist theory, V (the velocity of money) remains relatively stable. Therefore, it changes M (the money supply) that primarily affects prices and economic production.
    Monetarist Theory vs. Keynesian 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. Both are mainstream policies in today’s modern economy.
    Under the monetary policy, the central bank or monetary authority takes a role. They influence the economy through instruments such as policy interest rates, open market operations, and reserve requirements. Under the fiscal policy, the government influences the economy through its budget. They can change expenditures or taxes to influence economic activity.
    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.
    References
    https://www.investopedia.com/terms/m/monetaristtheory.asp
    https://www.thebalance.com/monetarism-and-how-it-works-3305866
    https://www.investopedia.com/terms/k/keynesianeconomics.asp

  76. Avatar Ogbodo Emmanuel Chukwuemeka Reg no: 2019/246458 says:

    Assignment on ECO 204
    MONETARISM AND MONETARIST SYSTEM THEORY
    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.
    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.
    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
    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
    What is Monetary Policy?
    The most important economic tool under the regime of monetarist economics is monetary policy. It is controlled by the central banks of a sovereign country. The central bank is the entity responsible for money creation in an economy.
    Also, it increases the money supply in an economy by purchasing government bonds, and vice versa. It also exercises direct control over interest rates in the economy, which enables it to control credit flow and liquidity.
    1. Expansionary Monetary Policy
    Expansionary monetary policy is one wherein the central bank lowers interest rates to promote credit availability in an economy. It means that the cost of borrowing decreases, which enables people to borrow more and consequently spend more. Thus, increasing the money supply can stimulate the economy.
    2. Contractionary Monetary Policy
    Under the contractionary monetary policy regime, the central bank maintains high levels of interest rates in an economy and purchases little to no amounts of government debt. Thus, it drives up the cost of credit, which disincentivizes borrowing and, consequently, spending.
    Thus, a contractionary monetary policy decreases the money supply in the economy, drives down asset prices, and helps combat inflation. Also, it can negatively impact economic growth.
    The Failure of Monetarism
    However, the connection link between money supply and price levels seems to have been overestimated, as was proved in the failure of monetary economics in the last 1970s and early 1980s. Also known as the Federal Reserve’s Monetarist Experiment, the monetary tightening was not able to curb short-term inflation during this period.
    There was also a growing skepticism regarding the actual stability of money demand. Many believed that money demand was pretty volatile, even on a quarterly level. Since a significant time lag is observed in the actual effects of monetary policy changes, monetarism started losing credibility.
    Currently, most central banks stick to inflation targeting rather than adopting monetary targets.
    conclusion, money supply determines the rate of economic growth. Thus, when the monetary authority ( Central Bank) of a country increases it’s money supply, there will be increase in economic activities and vice versa.

    References

    https://www.investopedia.com
    https://www.cooperatefinanceinstitute.com

  77. Avatar NWAFOR EMMANUEL ONYEDIKACHI says:

    NWAFOR EMMANUEL ONYEDIKACHI
    2019/250914
    emmanuel.nwafor.250914@unn.edu.ng

    THE MONETARIST MACRO ECONOMIC SYSTEM

    The Monetarist macroeconomic system is a macroeconomic theory which conveys the idea that governments can influence its economy by focusing on its money supply. According to this school of thought, if a nation’s supply of money increases, economic activity will increase—and vice versa. 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. In simple terms Monetarism is an economic theory that focuses on the macroeconomic effects of the supply of money. The Monetarist system is the work of many economists but an American economist known as Milton Friedman is the most famous person who drove monetarism into the light. Its important to note that this school of thought acknowledges that there are other important factors that determine the growth of any economy, but to this school of thought, the supply of money in any given economy is the most important factor. The Monetarist theory also asserts that variations in the money supply have major influences on national output in the short run and on price levels over longer periods.
    In the monetarist theory there is something known as the quantity theory of money. This theory of money is the visual representation of the ideas that the monetarist school of thought wants the world to see, the formula in words basically outlines the following information’s which are that the money supply multiplied by the velocity of money is equal to the price of goods multiplied by the quantity of goods and services i.e. MV=PQ, thus when we analyze this formula we can say that if V (i.e. velocity of money: the number of times the average unit of money is used) remains constant and there is an increase in M (i.e. money supply) there would be corresponding increase in the value of P (prices of goods) or that of Q (quantity of goods) or both P and Q will increase, and this would cause there to be an increase in GDP which is the primary goal of any state that wants to grow. Furthermore, it is to be noted that there are two potential dangers in monetarism which are too much inflation and too little inflation, where too much inflation can be explained simply by the simple fact that the government is releasing too much new money into circulation and this can be controlled by the government simply cutting back on the new money it is releasing into the system and too little inflation, which can lead to deflation can be corrected by the government when they constantly supply more and more new money into the economy so that it would become stabilized.
    Another important note to take about the monetarist school of thought is that they strongly believe that controlling an economy through fiscal policy is not the best course of action because it introduces microeconomic distortions that reduce the overall economic efficiency of the state. They would rather that the state makes use of monetary policy as a tool to manage aggregate demand in a way that will be more neutral from a microeconomics standpoint and that avoids the deadweight losses and social costs that fiscal policy creates in markets.

    REFERENCES
    “Monetary Central Planning and the State, Part 27: Milton Friedman’s Second Thoughts on the Costs of Paper Money”. Archived from the original on November 14, 2012.
    “Real Gross Domestic Product for United Kingdom, Federal Reserve Bank of St. Louis”. Retrieved December 16, 2018.
    Bordo, Michael D. (1989). “The Contribution of A Monetury History”. Money, History, & International Finance: Essays in Honor of Anna J. Schwartz. The Increase in Reserve Requirements, 1936-37. University of Chicago Press. p. 46. CiteSeerX 10.1.1.736.9649. ISBN 0-226-06593-6. Retrieved 2019-07-25.
    Doherty, Brian (June 1995). “Best of Both Worlds”. Reason. Retrieved July 28, 2010.
    Friedman, Milton (2008). Monetary History of the United States, 1867-1960. Princeton University Press. ISBN 978-0691003542. OCLC 994352014.
    wikipedia.org
    investopedia.com
    Ip, Greg; Whitehouse, Mark (2006-11-17). “How Milton Friedman Changed Economics, Policy and Markets”. The Wall Street Journal.
    Jump up to:a b Friedman, Milton (1970). “A Theoretical Framework for Monetary Analysis”. Journal of Political Economy. 78 (2): 193–238 [p. 210]. doi:10.1086/259623. JSTOR 1830684.
    Jump up to:a b Harvey, David (2005). A Brief History of Neoliberalism. Oxford University Press. ISBN 978-0-19-928326-2.

  78. Avatar Idajor John Ayuochieyi says:

    Reg. Number: 2019/248707
    MONETARY ECONOMIC SYSTEM
    The monetary economic system is a system that adopts the supply of money in the economy. By supply of money we mean the total money in circulation and the rate at which it changes hand. They believe that that which controls the rate of growth of the economy is the supply or the presence of money in such economy.
    When there is an increase in the aggregate supply of money in the economy, there is also an increase in the demand for goods and services which gives room for increase in the prices of goods and services and as such leads to inflation. On the other hand, when the supply of money in the economy decreases, there is also the likeliness of deflation.
    The supply of money is mostly viewed in the traditional and Keynesian perspectives. According to this view, money supply is defined firstly as the currency with the public and the demand deposit with the commercial bank. This is denoted by M1 which is equal to deposit with the commercial bank plus currency with the public (M1 = C + D). This is known as the narrow definition.
    Secondly, it is defined as the money in circulation, the demand deposit and time deposit. The time deposits are fixed with the commercial bank. This definition is broaden from the first. Thus, M2 = M1 + T which is M2 = C + D + T
    The third definition is known as the broadest definition which includes: currency with the public, demand deposit, time deposit and deposit of other financial institutions. It uses the formula: M3 = M1 + M2 + liabilities of other financial institutions. This last definition is the broadest because it covers all aspect of the economy.
    The supply of money in the economy is being regulated by the government and its agencies and as such a policy known as monetary policy is formed in order to control the supply of money in the economy. Money policies are those rules set by the government in the economy on the circulation of money and interest rate in order to achieve some certain goals. With these rules, the government are able to control the supply of money in the economy especially through the central bank which governs all the commercial banks in the country. When there is too much money in circulation, the central bank stop lending to the commercial banks and when there is less money in circulation, the central bank issues money to the commercial banks.
    In monetarism, there are people who came up with theories in regards to the supply of money in the economy, some are: Milton Friedman and John Maynard Keynes.
    Friedman asserted that: the government should the money supply fairly steady, expanding it slightly each year to allow for the natural growth of the economy. He also said that monetary policy should be done based on targeting the growth rate of the money supply to maintain economic and price stability.
    Central to monetarism is the “quantity theory of money,” which monetarists adopted from earlier economic theories and integrated into the Keynesian framework of macroeconomics. The theory 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 = average price of goods and services
    Q = quantity of goods and services
    It is important to note that monetarists believe that M that is money supply are the drivers of the above given equation. A change in M directly affects and determines employment, inflation and production. The assumption that velocity is held constant form the original version of quantity theory of money was dropped by John Maynard Keynes who now believed that velocity is predictable.
    The growth of the economy is a function of economic activities ( that is Q) and inflation ( that is P). If velocity is constant, 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 money supply, therefore, will directly determine prices, production and employment.
    Another theory propounded in monetarist economy is the liquidity preference theory by John Maynard Keynes. It is a refined theory from the quantity theory of money of which Keynes believed that velocity should not be constant but predictable since the economy is volatile and subject to periodic instability. His theory emphasis on how change in money supply influence the price level and aggregate demand.
    This change he initiated made monetarists to build on his theory by assuming the same macroeconomic framework and integrating the equation of exchange.
    Although the government controls money supply, there are some things that determines such supplies. There are two views that determines the supply of money in the economy, they are supplied exogenously and endogenously. When supplied endogenously, it means money supply is determined by the central bank and when supplied endogenously, it means the people desires to hold currency than depositing it in the bank.

  79. Avatar Idajor John Ayuochieyi says:

    Reg. Number: 2019/248707
    Solutions
    MONETARY ECONOMIC SYSTEM
    The monetary economic system is a system that adopts the supply of money in the economy. By supply of money we mean the total money in circulation and the rate at which it changes hand. They believe that that which controls the rate of growth of the economy is the supply or the presence of money in such economy.
    When there is an increase in the aggregate supply of money in the economy, there is also an increase in the demand for goods and services which gives room for increase in the prices of goods and services and as such leads to inflation. On the other hand, when the supply of money in the economy decreases, there is also the likeliness of deflation.
    The supply of money is mostly viewed in the traditional and Keynesian perspectives. According to this view, money supply is defined firstly as the currency with the public and the demand deposit with the commercial bank. This is denoted by M1 which is equal to deposit with the commercial bank plus currency with the public (M1 = C + D). This is known as the narrow definition.
    Secondly, it is defined as the money in circulation, the demand deposit and time deposit. The time deposits are fixed with the commercial bank. This definition is broaden from the first. Thus, M2 = M1 + T which is M2 = C + D + T
    The third definition is known as the broadest definition which includes: currency with the public, demand deposit, time deposit and deposit of other financial institutions. It uses the formula: M3 = M1 + M2 + liabilities of other financial institutions. This last definition is the broadest because it covers all aspect of the economy.
    The supply of money in the economy is being regulated by the government and its agencies and as such a policy known as monetary policy is formed in order to control the supply of money in the economy. Money policies are those rules set by the government in the economy on the circulation of money and interest rate in order to achieve some certain goals. With these rules, the government are able to control the supply of money in the economy especially through the central bank which governs all the commercial banks in the country. When there is too much money in circulation, the central bank stop lending to the commercial banks and when there is less money in circulation, the central bank issues money to the commercial banks.
    In monetarism, there are people who came up with theories in regards to the supply of money in the economy, some are: Milton Friedman and John Maynard Keynes.
    Friedman asserted that: the government should the money supply fairly steady, expanding it slightly each year to allow for the natural growth of the economy. He also said that monetary policy should be done based on targeting the growth rate of the money supply to maintain economic and price stability.
    Central to monetarism is the “quantity theory of money,” which monetarists adopted from earlier economic theories and integrated into the Keynesian framework of macroeconomics. The theory 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 = average price of goods and services
    Q = quantity of goods and services
    It is important to note that monetarists believe that M that is money supply are the drivers of the above given equation. A change in M directly affects and determines employment, inflation and production. The assumption that velocity is held constant form the original version of quantity theory of money was dropped by John Maynard Keynes who now believed that velocity is predictable.
    The growth of the economy is a function of economic activities ( that is Q) and inflation ( that is P). If velocity is constant, 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 money supply, therefore, will directly determine prices, production and employment.
    Another theory propounded in monetarist economy is the liquidity preference theory by John Maynard Keynes. It is a refined theory from the quantity theory of money of which Keynes believed that velocity should not be constant but predictable since the economy is volatile and subject to periodic instability. His theory emphasis on how change in money supply influence the price level and aggregate demand.
    This change he initiated made monetarists to build on his theory by assuming the same macroeconomic framework and integrating the equation of exchange.
    Although the government controls money supply, there are some things that determines such supplies. There are two views that determines the supply of money in the economy, they are supplied exogenously and endogenously. When supplied endogenously, it means money supply is determined by the central bank and when supplied endogenously, it means the people desires to hold currency than depositing it in the bank.

  80. Avatar NNA OZIOMA VINE says:

    NAME:. NNA OZIOMA VINE
    REG No:. 2019/247263
    COURSE CODE:. ECO 204
    COURSE TITLE:. MACROECONOMICS 11
    DEPARTMENT:. ECONOMICS
    EMAIL:. nnaozioma71@gmail.com
    ASSIGNMENT: UNDERSTANDING MONETARISM AND THE MONETARIST SYSTEM.
    WHAT IS MONETARISM?
    Monetarism is a macroeconomics theory which states that governments can foster economic stability by targeting the growth rate of the money supply. Essentially, it is a set of views based on the belief that the total amount of money in an economy is the primary determinant of economic growth.
    DEFINITIONS OF MONETARISM SYSTEM
    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 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.
    MONETARIST 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”. 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.
    REFERENCE
    The American Economic Review 66 (2), 163-170, 1976.

  81. Avatar Nnamdi chukwunweike lucky says:

    NNAMDI CHUKWUNWEIKE LUCKY
    REG NO: 2019/247233
    DEPARTMENT: COMBINED SOCIAL SCIENCE ( ECO/SOC)
    COURSE: THEORY OF MICROECONOMICS (204)
    ASSIGNMENT: DISCUSS MONETARISM MACROECONOMIC SYSTEM

    What Is The Concept Of Monetarism Macroeconomic System?
    Monetarism is a macroeconomic theory stating that governments can foster economic stability by targeting the growth rate of the money supply. It is a branch of Keynesian economics that emphasizes the use of monetary policy over fiscal policy to manage aggregate demand, contrary to most Keynesians.
    Monetarism are views based on the belief on the total amount of money in an economy is the main determinants of economic growth, in which the availability of money in the system increases, aggregate demand for goods and services goes up. An increase in aggregate demand encourages job creation, which reduces the rate of unemployment and stimulates economic growth. Monetarism is closely associated with economist Milton Friedman, who 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.
    The quantity theory of money
    The quantity theory of money can be summarized in the equation of exchange, formulated by John Stuart Mill, which states that the money supply, multiplied by the rate at which money is spent per year, equals the nominal expenditures in the economy. The formula is given as:

    MV = PQ
    Where;
    M= Money supply
    V= Velocity (rate at which money changes hand)
    P= Average price level of goods and services
    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, which is the FISHERIAN QUANTITY THEORY OF MONEY, V is held to be constant. In this view(Monetarism), V may not be constant or stable, but it does vary predictably enough with business cycle conditions that its variation can be adjusted for by policymakers and mostly ignored by theorists.
    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.

    However, An increase in P denotes that Q will remain constant, while an increase in Q means that P will be relatively constant. According to monetarism, variations in the money supply will affect price levels over the long term and economic output in the short term. A change in the money supply, therefore, will directly determine prices, production, and employment.
    The Rational Between Fisherian And Monetarist Quantity Theory Of Money
    Fisherian theory, suggests there is a mechanical and fixed proportional relationship between changes in the money supply and the general price level. This popular, formulation of the quantity theory of money is based upon an equation by American economist Irving Fisher.
    The Fisher equation is calculated as:

    M×V=P×T
    where:
    M=money supply
    V=velocity of money
    P=average price level
    T=volume of transactions in the economy
    Generally, the quantity theory of money explains how increase in quantity of money tend to create inflation and vice versa. However, in the theory equation, V was assumed to be constant and T is assumed to be stable with respect to M, so that a change in M directly impacts P. In other words, if the money supply increases then the average price level will tend to rise in proportion (and vice versa), with little effect on real economic activity.
    But, it must be noted that Economist disagree about how quickly and how proportionately prices adjust after a change in the quantity of money, and about how stable V and T actually are with respect to time and to M.

  82. Avatar Asogwa Ijeoma Agatha. 2019/251105 says:

    DEFINITION OF MONETARISM
    Many monetarist scholars such as Thomas Mayer, Jerome Stein, Douglas Purvis, David Laidler and James Meade, have surveyed the concept of monetarism yet there is no universally accepted definition of monetarism. It is a school of economic thought that maintains that the money supply (the total amount of money in an economy, in the form of coin, currency, and bank deposits) is the chief determinant on the demand side of short-run economic activity.
    Monetarism was a reaction to early Keynesianism, which totally disregarded and discredited the role of money. Thus, it can be referred to as a theory about money which tries to make money heard because money is one of the more important variables affecting economic activity. Friedman notes that “most economists now believe that what happens in financial
    markets does play a major role in determining non-financial activity
    Monetarism appears to be a blend of Keynesian and classical theories. Like the Keynesians, it treats money as one among many assets in people’s portfolios, and by advocating the existence of a direct connection between money supply and spending, monetarism clearly subscribes to a fundamental premise of the classical system.
    EVOLUTION/HISTORY OF MONETARISM
    Modern monetarism probably got its start in the late 1950s with the publication of influential academic papers arguing
    that the quantity of money played an important role in the determination
    of national income.
    Monetarism arose as a reaction to an obvious imbalance in early Keynesian thinking, which disregarded behavior in the
    financial sector in analyzing the determinants of GNP and other important
    macroeconomic variable.
    CHARACTERISTIC OF MONETARISM
    There have been several attempts to specify monetarism key characteristics. For (Laidler, 1981), monetarism has four characteristics:
    A quantity theory approach to macroeconomic analysis
    The analysis of the division of money income fluctuations between the price level and real income
    A monetary approach to balance of payments and exchange rate theory.
    Hatred for activist stabilization policy, wage and price controls, as well as, support for long-run monetary policy.

    Advantages of Monetarism on the Economy
    Monetary policy impacts the money supply in an economy, which influences interest rates and the inflation rate. It also impacts business expansion, net exports, employment, the cost of debt, and the relative cost of consumption versus saving—all of which directly or indirectly impact aggregate demand.
    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.
    Disadvantages Of Monetarism
    Despite expansionary monetary policy, there is still no guaranteed economy recovery.
    Some economists who criticize the Federal Reserve on the policy say that in times of recession, not all consumers will have confidence to spend and take advantage of low interest rates. If this is the case, then it is a disadvantage.
    2. Cutting interest rates is not a guarantee.
    Others also claim that even if the banks are given lower interest rates by the Central Bank when they borrow money, some banks might have the funds. If this happens, there will be insufficient funds people can borrow from them.
    3. It will not be useful during global recession.
    Proponents of expansionary monetary policy say that even if banks will lower interest rates and more consumers will spend money, during a global crisis, the export industry might suffer. They say that if this is the current situation, the losses of exporters are more than what businesses can earn from sales.
    However, the connection link between money supply and price levels seems to have been overestimated, as was proved in the failure of monetary economics in the last 1970s and early 1980s. Also known as the Federal Reserve’s Monetarist Experiment, the monetary tightening was not able to curb short-term inflation during this period.
    There was also a growing skepticism regarding the actual stability of money demand. Many believed that money demand was pretty volatile, even on a quarterly level. Since a significant time lag is observed in the actual effects of monetary policy changes, monetarism started losing credibility.
    Currently, most central banks stick to inflation targeting rather than adopting monetary targets.
    Monetarists advanced the classical program, emphasizing control of inflation as a desirable end in itself and, through the use of stabilizing institutions, as a means of improving the economy’s performance. Keynesians began by minimizing the role of monetary policy but shifted eventually to highlighting the use of monetary policy for short-term stabilization.

    REFERENCE
    Journal of Economic Literature
    Vol. XXII (March 1984), pp. 58-76
    Two Types of Monetarism
    By Kevin D. Hoover

    Monetarism: An Interpretation and an Assessment
    Author(s): David. Laidler
    Source: The Economic Journal, Vol. 91, No. 361 (Mar., 1981), pp. 1-28
    The Evolution of Monetarism
    Author(s): Ronald L. Teigen
    Source: Zeitschrift für die gesamte Staatswissenschaft / Journal of Institutional and Theoretical
    Economics, Bd. 137, H. 1. (März 1981), pp. 1-16
    Author(s): George G. Kaufman
    Review by: George G. Kaufman
    Source: Journal of Money, Credit and Banking, Vol. 12, No. 1 (Feb., 1980), pp. 113-116

  83. Avatar chukwudolue kamsi says:

    Kamsi chukwudolue Edward 2019/244066
    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. From the question which states that 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. I totally agree because all the money gotten from a community is what the government use as revenue to build the society

  84. Avatar Ngwoke Chidera Lilian/2019245394 says:

    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 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.
    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 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.
    How Money Supply Affects the Economy
    The central bank of a country can expand or contract the money supply through the manipulation of interest rates.

    For example, in the United States, the Federal Reserve can change the Fed Funds Rate – the interest rate at which banks can lend money overnight to other banks. The Fed funds rate affects all other interest rates in the economy.

    When the Fed funds rate is higher, interest rates increase overall. It decreases the amount of money lent to businesses and consumers, thus reducing spending and economic growth. Conversely, lowering interest rates increases borrowing by consumers and businesses, thus boosting spending and stimulating economic growth.

    The Underlying Equation
    There is an underlying equation that forms the foundation of the monetarist theory. It is known as the “equation of exchange” (also referred to as the “quantity theory of money”). Although the equation’s become quite complex due to its expansion and refinement by recent economists, the basic equation is expressed as follows:
    M 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 – GDP) and employment levels.
    The best monetary policy for a central bank to follow is to peg the money supply’s growth rate to match the rate of growth of real GDP – it is the best policy to support continuing economic growth and keep the rate of inflation relatively low.
    The last point is the key to the monetarist theory. Monetarist economists believe that the central bank’s manipulation of the money supply should be restricted. They believe that a central bank that more actively attempts to change the money supply is more likely to harm the economy than to benefit it.

    However, this contention may be heavily tied to the monetarists’ basic distrust of central banks as an institution. The idea runs counter to the Keynesian Economic Theory, which favors active, unrestricted intervention by the central bank.
    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 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 proRvide 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.
    Reference
    Investopedia
    Wikipedia
    Encyclopedia Britannica

  85. Avatar Ukaegbu Nneoma Roseline 2019/245510 says:

    MONETARISTS SYSTEM
    Introduction
    Monetarism is a macroeconomic theory stating that governments can foster economic stability by targeting the growth rate of the money supply.
    Central to monetarism the quantity theory of money is emphasized, 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.
    This system however is closely associated with the economist Milton Friedman, who emphasizes that the government should keep the money supply fairly steady, (i.e expanding it slightly each year) primary to allow for the natural growth of the economy.
    Also monetarism is a branch of Keynesian economics that emphasizes on the preferred 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, we can say that some core tenets of the theory have become a mainstay in nonmonetarist analysis.

    ANALYSING MONETARISM
    Monetarism is an economic school of thought which states that the supply of money in an economy is the major driver of economic growth. As the availability of money in the system increases, aggregate demand for goods and services goes up. This increase encourages aggregate demand encourages job creation, which reduces the rate of unemployment and promotes economic growth.

    MONETARY POLICY
    Monetary policy, an economic tool used in monetarism, which is implemented to adjust interest rates that, in turn, control the money supply. When the is increment in interest rate, 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 SAY ON MONETARISM SYSTEM
    Monetarism is closely associated with economist Milton Friedman, who states, based on the quantity theory of money, that the government should keep the money supply fairly steady, 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 stability.
    As 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.

    KEYNESIAN SAY ON MONETARISM SYSTEM
    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 (i.e rate at which money changes hands)
    P=average price of a good or service
    Q=quantity of goods and services sold

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

  86. Avatar Ugwueze Amarachi Emelda. Reg. No: 2019/250928 says:

    The Monetarist Macroeconomic System.
    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.
    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 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’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.
    How Money Supply Affects the Economy:
    The central bank of a country can expand or contract the money supply through the manipulation of interest rates.
    For example, in the United States, the Federal Reserve can change the Fed Funds Rate – the interest rate at which banks can lend money overnight to other banks. The Fed funds rate affects all other interest rates in the economy. When the Fed funds rate is higher, interest rates increase overall. It decreases the amount of money lent to businesses and consumers, thus reducing spending and economic growth. Conversely, lowering interest rates increases borrowing by consumers and businesses, thus boosting spending and stimulating economic growth.
    The Underlying Equation:
    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 – GDP) and employment levels.
    The best monetary policy for a central bank to follow is to peg the money supply’s growth rate to match the rate of growth of real GDP – it is the best policy to support continuing economic growth and keep the rate of inflation relatively low.
    The last point is the key to the monetarist theory. Monetarist economists believe that the central bank’s manipulation of the money supply should be restricted. They believe that a central bank that more actively attempts to change the money supply is more likely to harm the economy than to benefit it.
    However, this contention may be heavily tied to the monetarists’ basic distrust of central banks as an institution. The idea runs counter to the Keynesian Economic Theory, which favors active, unrestricted intervention by the central bank.
    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 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.

    Reference:
    Corporate finance institute.com .
    econlib.org .

  87. Avatar Okoro Henry Chukwuebuka 2019/249001 says:

    To begin with monetarism and monetary system has to be understood.
    Firstly, Monetarism
    Monetarism is a macro economic theory that states governments can promote economic stability through targeting the growth rate of the money supply. Most importantly, it is a set of views based on the belief that the total amount of money in an economy is the root of economic growth.
    Monetarism being a school of economic thought maintains that the total amount of money in an economy (money supply) In form of coin, bank deposit, currency is the highest determinant on the demand side of the short run economic activity. Friedman and others (monetarists) advocate a macro economic theory and policy that diverge significantly from those of the formerly dominant Keynesian school. During the 1970’s and early 80’s monetarist approach became influential.
    *Monetarist Theory.
    Monetarist Theory can be seen as a set of Ideas about how changes in the money supply impact levels or standard of economic activity.
    The monetarist theory is an economic concept that contends that changes in money supply are the most significant determinants of the rate of economic growth and how the business cycle behaves.
    *Understanding monetarism and monetary theory. Monetarism is an economic school of taught which states that the supply of money in an economy is the primarily the source of economic growth. Once the availability of money in the system increase, aggregate demand for goods and services increases. An increase in aggregate demand supports job creation, which reduces the rate of unemployment and then stimulates economic growth.
    * Monetary policy: this is an economic tool used in Monetarism, that has the duty of adjusting interest rates that in turn controls the money supply. When interest rates are increased, people have more of an incentive to keep than to spend, there by reducing the money supply.
    Obversly, when interest rates are lowered following expansionary monetary scheme the cost of borrowing decreases, which means people can borrow more and spend more there by boosting the economy.
    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.
    With this, money supply will be expected to grow moderately, business will be able to anticipate the changes to the money supply every year and plan accordingly, the economy will improve at a steady rate, and inflation will be kept at low levels.
    In understanding monetary theory, According to monetarist theory. If a nation’s supply of money increases, economic activity will increase and the other way.
    Okoro Henry Chukwuebuka
    2019/249001
    Economics.

  88. Avatar ALEKE CHINWENDU CONFIDENCE says:

    A monetarist is someone who believes an economy should be controlled predominantly by the supply of money. While 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. 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 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:
    , which means people can borrow more and spend more, thereby stimulatin 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 soldsol
    

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

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

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

    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.­

    Department: library and information science
    Faculty: Education
    Registration number: 2020/247015

  89. Avatar DINYELU CHIKAODILI LOVETTE says:

    NAME: DINYELU CHIKAODILI LOVETTE
    REG. NUMBER: 2019/245486
    DEPARTMENT: COMBINED SOCIAL SCIENCE (ECONOMICS/POLITICAL SCIENCE)
    FACULTY: SOCIAL SCIENCE
    COURSE TITLE: MACROECONOMICS
    COURSE CODE: ECO 204
    LEVEL: 200 LEVEL
    ASSIGNMENT: EXPLAIN MONETARY MACROECONOMICS SYSTEM

    What Is Monetarism?
    There has been different definitions as to what macroeconomics is which will be discussed below;
    Firstly,It’s 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 an 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.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 and who is the father 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 Friedman’s book, A Monetary History of the United States 1867–1960, he 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.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
    Here, we look at Monetarism as an economic school of thought which states that the supply of money in an economy is the primary driver of economic growth. As the availability of money in the system increases, aggregate demand for goods and services goes up. An increase in aggregate demand encourages job creation, which reduces the rate of unemployment and stimulates economic growth.Monetary policy, an economic tool used in monetarism, is implemented to adjust interest rates that, in turn, control the money supply. When interest rates are increased, people have more of an incentive to save than to spend, thereby reducing or contracting the money supply. Contrarily, when interest rates are lowered following an expansionary monetary scheme, the cost of borrowing decreases, which means people can borrow more and spend more, thereby stimulating the economy.
    The Quantity Theory of Money
    Central to monetarism is the “quantity theory of money,” which monetarists adopted from earlier economic theories and integrated into the general Keynesian framework of macroeconomics. The quantity theory of money can be summarized in the equation of exchange, formulated by John Stuart Mill, which states that the money supply,multiplied by the rate at which money is spent per year, equals the nominal expenditures in the economy. The formula is given as; MV=PQ where:
    1) M=money supply 2) V=velocity (rate at which money changes hands) 3) P=average price of a good or service 4) Q=quantity of goods and services
    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. 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.

    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.
    Reference
    1. Phillip Cagan, 1987. “Monetarism”, The New Palgrave: A Dictionary of Economics, v. 3, Reprinted in John Eatwell et al. (1989), Money: The New Palgrave, pp. 195–205, 492–97.
    2. Harvey, David (2005). A Brief History of Neoliberalism. Oxford University Press. ISBN 978-0-19-928326-2.
    3. Friedman, Milton (2008). Monetary History of the United States, 1867-1960. Princeton University Press. ISBN 978-0691003542. OCLC 994352014.
    4. Doherty, Brian (June 1995). “Best of Both Worlds”. Reason. Retrieved July 28, 2010.

  90. NAME: UDEOGWU PRECIOUS KOSARACHI
    REG NO: 2019/244167
    DEPARTMENT: ECONOMICS/PHILOSOPHY

    Discuss monetarist macroeconomics

    Monetarism
    Is a macroeconomics theory that states that governments can foster economic stability by targeting the growth rate of the money supply. Essentially, it is a set of Views based on the belief that the total amount of money in an economy is the primary determinant of economic growth.

    What is the Monetarist Theory?
    The monetarist theory (also referred to as monetarism”)
    Is a fundamental macroeconomictheory that focuses on the importance of the moneysupply as a key economic force. Advocates of this theory believe that money supply is a primarydeterminant of price levels and inflation.
    Increasing money supply, according to the theory, inevitably leads to higher prices and inflation, whiledecreasing the money supply leads to deflation andrisks, causing a recession. This is to say that money is the major key factor that determines the economic stability and disability of an economic state.
    To the monetarist, Changes in the money supply also affectemployment and production levels, but themonetarist theory asserts that those effects are onlytemporary, while the effect on inflation is more long-lasting and significant.
    According to the theory, monetarist policy is a much effective tool than the fiscal policy for stimulating the economy or slowing down the rate of inflation. It further argues that central bank which jcontrols the levers of money policy can exert much power over economic growth rates by tinkering with the amount of currency and other liquid instruments circulating in a country’s economy.

    History of the Monetarist Theory
    While economist Clark Warburton initially posited much of the monetarist theory immediately following World WarIl, Milton Friedman is recognized as the primary advocate of modern-day monetarism. The monetarist theory was expounded by Friedman in a book he co-wrotewith Anna Schwartz, “A Monetary History of theUnited States, 1867-1960,” and in a 1967 speech atthe American Economic Association.
    Interestingly, while the monetarist theory isessentially a guide for central bank policies, Friedman was opposed to the whole idea ofcentral banks, such as the Federal Reserve Bank inthe United States.
    In fact, Friedman blamed much of the GreatDepression of the 1930s on the Federal Reserve, arguing that the Fed tightened the money supply atthe very moment that it should have beenexpanding it to stimulate economic growth.

    How Money Supply Affects the Economy
    The central bank of a country can expand orcontract the money supply through the manipulation of interest rates. For example, in the United States, the FederalReserve can change the Fed Funds Rate theinterest rate at which banks can lend moneyovernight to other banks. The Fed funds rateaffects all other interest rates in the economy.
    When the Fed funds rate is higher, interest ratesincrease overall. It decreases the amount ofmoneylent to businesses and consumers, thusreducing spending and economic growth.Conversely, lowering interest rates increasesborrowing by consumers and businesses, thusboosting spending and stimulating economicgrowth.

    The Underlying Equation
    The Underlying EquationThere is an underlying equation that forms thefoundation of the monetarist theory. It is knownas the “equation of exchange” (also referred to asthe “quantity theory of money”). Although theequation’s become quite complex due to itsexpansion and refinement by recent economists,the basic equation is expressed as follows:
    Monetarist Theory Equation :MxV= PxQ Where
    M is the money supply
    V is the velocity of money (the rate ofturnover at which a single unit of currency -e.g., one dollar – is spent in one year)
    P is the average price level for transactions inthe economy (the purchase of goods and
    services)
    Q is the total quantity of goods and services produced-ieeconomic output or production.
    According to the monetarist theory, V (the velocityof money) remains relatively stable. Therefore, it
    changes M (the money supply) that primarilyaffects prices and economic activities.

    Major Assumptions of the monetarist theory
    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 onlyshort-term effects on economic output (i.e.,Gross Domestic Product – GDP) andemployment levels.
    The best monetary policy for a central bank tofollow is to peg the money supply’s growthrate to match the rate of growth of real GDP -it is the best policy to support continuingeconomic growth and keep the rate ofinflation 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 shouldbe 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.

    Characteristics of Monetarism
    Monetarism is a mixture ofThe theoreticalOn ortheoretical ideas, philosophicalquantity theory of Moneybeliefs, and policy prescriptions. Here we list the most important ideasand policy implications and explainthem below.
    1. The theoretical foundation is theQuantity Theory of Money.
    2. The economy is inherently stableMarkets work well when left tothemselves. Governmentintervention can often timesdestabilize things more than theyhelp. Laissez faire is often the bestadvice.
    3. The Fed should be bound to fixedrules in conducting monetarypolicy. They should not havediscretion in conducting policybecause they could make theeconomy worse off.
    4. Fiscal Policy is often bad policy. Asmall role for government is good.

    The Rules vs. Discretion Debate on monetarism
    Because monetarists believe that the money supply is the primary determinant of nominal GDP in the short run, and of the price level in the long run, they think that control of the money supply should not be left to the discretion of central bankers. Monetarists believe in a set of “rules” that the Federal Reserve must follow. In particular, Monetarists prefer the Money growth rule: The Fed should be required to target the growth rate of money such that it equals 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. Monetarists wish to take much of the discretionary power out of the hands of the Fed so they cannot destabilize the economy.
    Keynesians balk at this proposed money growth rule. Keynesians believe that velocity is inherently unstable and they do not believe that markets adjust quickly to return to potential output. Therefore, Keynesians attach little or no significance to the Quantity Theory of Money. Because the economy is subject to deep swings and periodic instability, it is dangerous to take discretionary power away from the Fed. The Fed should have some leeway or “discretion” in conducting policy. So far, Keynesians have won this debate. There has not been serious talk in some time of tying the Fed to a fixed money growth rule.

  91. Avatar ATTAMA LILIAN OGECHUKWU says:

    UNIVERSITY OF NIGERIA, NSUKKA
    FACULTY OF SOCIAL SCIENCES
    DEPARTMENT OF ECONOMICS

    DISCUSS MONETARIST MACRO ECONOMIC SYSTEM

    AN ASSIGNMENT

    PREPARED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE COURSE ECO 204 (INTRODUCTION TO MACRO ECONOMICS II)

    BY

    ATTAMA LILIAN OGECHUKWU
    2019/243411

    DATE:

    FEBRUARY, 12TH 2021

    DEDICATION
    To the God Almighty for His inspiration.

    ACKNOWLEDGEMENT
    My profound gratitude goes to my amiable lecturer, for making his unwavering tutelage in the Course INTRODUCTION TO MACRO ECONOMICS II (ECO 204). May God bless you and your family. Amen.

    TABLE OF CONTENTS
    Title Page i
    Dedication ii
    Acknowledgements iii
    Table of Contents iv
    Introduction 1
    The Monetarist Theory 2
    How the Monetarist Theory works in Macro-economic System 4
    Conclusion 4
    References 6

    Introduction
    Monetarist macroeconomic system has existed as an identifiable, recognizable, profitable point of view in modern macro-economics for about a quarter century (Robert, 2014). Macroeconomic phenomena are the product of all the microeconomic activity in an economy. The precise relationship between macro and micro is not particularly well understood, which has often made it difficult for a government to deliver well-run macroeconomic policy (Okpara, 2010).
    Monetarism is an economic theory which focuses on the macroeconomic effects of a nations money supply and its central banking institution. It focuses on the supply and demand for money as the primary means by which economic activity is regulated. Formulated by Milton Friedman, it argued that excessive expansion of the money supply will inherently lead to price inflation, and that monetary authorities should focus solely on maintaining price stability to maintain general economic health (Chevallier, 2016).
    Monetarism proposes that the growth of the money supply should be regulated to increase parallel to the potential growth of the Gross Domestic Product (GDP), and that this will stabilize prices, ensuring healthy economic growth with low inflation. Most followers of monetarism believe that government action is at the root of inflation, and view the former United States gold standard as highly impractical. While monetarism provided a foil to the previously Keynesian approach, by arguing that “money matters,” it became apparent that controlling the money supply was not enough for economic health (John, 2012).
    The economic system of human society can be likened to a human body that has suffered ill-health, including the collapse of several banking systems, currencies, with out-of-control inflation, and catastrophic depressions. As humankind develops greater maturity, learning to live for the sake of others not exploiting or harming them, and a peaceful world of harmony and co-prosperity is established, our understanding of the factors that are essential to economic health will become clearer. The development of the monetarist approach can be seen as an important step in that process, although not the final one (IOkelegbe, 2013).
    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. Inflation 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) (John, 2012).
    Increasing money supply, according to the theory, inevitably leads to higher prices and inflation, while decreasing the money supply leads to deflation. Deflation 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.
    How the Monetarist Theory works in Macro-economic System
    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, 18671960, and in a 1967 speech at the American Economic Association (John, 2012).
    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. The Great Depression was a worldwide economic depression that took place from the late 1920s through the 1930s. For decades, debates went on about what caused the economic catastrophe, and economists remain split over a number of different schools of thought. of the 1930s on the Federal Reserve, arguing that the Fed tightened the money supply at the very moment that it should have been expanding it to stimulate economic growth.
    Given that central banks do exist, Friedman argued that monetary policy the expansion or contraction of the money supply is a much more effective tool for influencing the economy than fiscal policy the governments taxation and spending activities.
    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). Gross domestic product (GDP) is a standard measure of a countrys 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 supplys 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 banks 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 (John, 2012).
    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.
    Conclusion
    Monetarism, as espoused by Friedman, stands in contrast to the Keynesian Economic Theory. 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.
    Monetarists in macro-economic system 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 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.
    .

    References
    Chevallier, J. P. (2016). On the Inverse Relation Between Excess Money Supply and Growth, Monetary Creation, Aggregates and GDP Growth. Retrieved 16 January, 2007.
    John J. K. (2012). A Monetarist Model of the Monetary Process: Discussion. The Journal of Finance, 25/2, Papers and Proceedings of the Twenty-Eighth Annual Meeting of the American Finance Association New York, N.Y. December, 28-30, 1969. 322-325. Retrieved 8 February, 2017.

    Ikelegbe, A. (2013). The Nigerian Economy: Emerging Trends, Reforms and Prospects, 2013 Economic Policy Forum on Emerging Economies, on Growth, Transformation and Reform: Emerging Economies in the Next Decade. Conference Organized by CIRD, CICETE, RDRF, UNDP and GIZ, at Haikou, China, November 1-2.

    Okpara, G. C. (2010). The Effect of Financial Liberalization on Selected Macroeconomic Variables: Lesson from Nigeria, The International Journal of Applied Economics and Finance, Vol. 4, No. 2, pp. 53-61
    Robert, V. (2014). Order, Unemployment, Inflation & Monetarism: A Further Analysis The American Economic Review, 67/4: 741-746. Retrieved on February 8, 2017.

  92. Avatar ONYELEONU PRECIOUS OLUOMACHI says:

    UNIVERSITY OF NIGERIA, NSUKKA
    FACULTY OF SOCIAL SCIENCES
    DEPARTMENT OF ECONOMICS

    DISCUSS MONETARIST MACRO ECONOMIC SYSTEM

    AN ASSIGNMENT

    PREPARED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE COURSE ECO 204 (INTRODUCTION TO MACRO ECONOMICS II)

    BY

    ONYELEONU PRECIOUS OLUOMACHI
    2019/248162

    DATE:

    FEBRUARY, 12TH 2021

    DEDICATION
    This work is dedicated to the God Almighty for His unreserved kindness and blessings to me.

    ACKNOWLEDGEMENT
    I want to use this opportunity to thank my amiable lecturer, for making INTRODUCTION TO MACRO ECONOMICS II (ECO 204) an interesting course. Keep up the good work and may God bless you and your family.

    TABLE OF CONTENTS
    Title Page i
    Dedication ii
    Acknowledgements iii
    Table of Contents iv
    Introduction 1
    The foundation of Monetarist Macro Economic System 2
    How Money Supply Affects the Economy 4
    Conclusion 5
    References 6

    Introduction
    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 960s. Sharply rising market interest rates were 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 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 (Burton, 2014).
    One school of 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 1970sbringing down inflation in the United States and United Kingdomand greatly influenced the U.S. central banks decision to stimulate the economy during the global recession of 2007 2009 (Higham and Tomlinson, 2012).
    Today, monetarism is mainly associated with Nobel Prize winning economist Milton Friedman. In his seminal work A Monetary History of the United States, 18671960, 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 (Obadan and Edop, 2018).
    The foundation of Monetarist Macro Economic System
    The foundation of monetarism is the Quantity Theory of Money. The theory is an accounting identitythat 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.
    How Money Supply Affects the Economy
    The central bank of a country can expand or contract the money supply through the manipulation of interest rates.
    For example, in the United States, the Federal Reserve can change the Fed Funds Rate and Federal Funds Rate. In 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 (Panić, 2015).
    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.
    Conclusion
    Monetarism has been expatiated as 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
    Many monetarists 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 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 Tarling, and Wilkinson, 2017).
    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
    Burton, J. (2014). The Varieties of Monetarism and their Policy Implications, Three Banks Review.

    Higham, D. and Tomlinson, J. (2012). Why do Governments Worry About Inflation?, Westminster Bank Review.

    Ikelegbe, A. (2013). The Nigerian Economy: Emerging Trends, Reforms and Prospects, 2013 Economic Policy Forum on Emerging Economies, on Growth, Transformation and Reform: Emerging Economies in the Next Decade. Conference Organized by CIRD, CICETE, RDRF, UNDP and GIZ, at Haikou, China, November 1-2.
    Obadan, M. I. and Edo, S.E. (2018). Nigerias Economic Governance Structures and Growth Performance in Perspective, The Nigerian Journal of Economic and Social Studies, Vol. 50 (1).
    Okpara, G. C. (2010). The Effect of Financial Liberalization on Selected Macroeconomic Variables: Lesson from Nigeria, The International Journal of Applied Economics and Finance, Vol. 4, No. 2, pp. 53-61.
    Panić, M. (2015). ‘Monetarism in an Open Economy’, Lloyds Bank Review.

    Tarling, R. and F. Wilkinson, (2017). Inflation and the Money Supply, Cambridge Economic Policy Review, no. 3.

    Yesufu, T. M. (2016). The Nigerian Economy: Growth Without Development, Benin City: University of Benin Social Sciences Series for Africa.

  93. Avatar Omitoogun Matteen Omidayo2019/244704 says:

    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.
    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.

    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.

  94. Avatar Okeke Michael Obinna [ combined social science-Eco/pol] [2019/250019] says:

    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 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.
    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.
    Monetary system
    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.
    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.

  95. Avatar Chidiebere James Chiwendu (2019/249120) says:

    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.What Is a Monetarist?A monetarist is an economist who holds the strong belief that money supply—including physical currency, deposits, and credit—is the primary factor affecting demand in an economy. Consequently, the economy’s performance—its growth or contraction—can be regulated by changes in the money supply.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.TAKEAWAYSMonetarists 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 economyMonetarist Macro Economic System/ Monetarism.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.Understanding MonetarismMonetarism 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 MonetarismMonetarism 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 MoneyCentral 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.Milton Friedman is the most famous monetarist, others include Alan Greenspan and Margaret Thatcher.
    ReferenceL.C. Anderson and K. Carlson (1970) “A Monetarist Model for Economic Stabilization”,  Vol. 52 (4), p.7-25.M. Friedman (1968) “The Role of Monetary Policy”, American Economic Review, Vol. 58, p.1-17. Reprinted in Friedman, 1969.M. Friedman (1968) “Money: the Quantity Theory”, International Encyclopedia of the Social Sciences, p.432-37. Reprinted in Friedman, 1969.Wikipedia: https://en.m.wikipedia.org/wiki/Monetarism

  96. Avatar Ugwu Somto Emmanuel says:

    MONETARIST MACRO ECONOMICS SYSTEM
    MONETARISM
    According to investopedia, Monetarism is a macroeconomic theory which states that governments can foster economic stability by targeting the growth rate of the money supply. It can also be seen as the an economic school of thought that recognizes the practice of controlling the supply of money as the chief method of stabilizing the economy. In other words, it is a theory which states that an economy’s stable growth is assured if the rate of increase of money supply is controlled.
    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.
    However, when there is an increase in money supply in an economy, it results to interest rate dropping and makes more money available for customers to borrow from banks. It will also encourage people or customers to be willing to borrow money without fear due to the low interest rate and will in turn create investments that will result to job creation which reduces the rate of unemployment and stimulates economic growth.
    Monetarism uses an economic tool known as monetary policy to adjust interest rates that, in turn, control the money supply. Monetary policy can be defined as the macroeconomic policy lay down by the central bank. It involves management of money supply and interest rate and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity. The primary objectives of monetary policies are the management of unemployment or inflation and maintenance of currency exchange rates. In a situation where interest rates are high, customers won’t be willing to borrow money from banks. They would want to save rather than spend which reduces money supply in an economy. But when interest rates are lowered using an expansionary monetary scheme, the cost of borrowing decreases, which means people can borrow more and spend more, thereby stimulating the economy.
    It is important to note that the founder of monetarism is known as an economist, Milton Friedman. He wrote a book known as A Monetary History of the United States 1867–1960 where 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. In other words, the government should implement the monetary policy by targeting the growth of money supply in an economy in other to ensure economic and price stability.
    According to the theory, monetary policy as also stipulated by the founder is a much more effective tool than the fiscal policy for stimulating the economy or slowing down the rate of inflation and unemployment.
    HISTORY OF MONETARISM

    Milton Friedman, as also written above is the founder or is recognized as the primary advocate of monetarism. He expounded the monetarist theory in a book he co wrote with Anna Schwartz which he called A Monetary History of the United States, 1867 to 1960, and a 1967 speech at the American Economic Association. Monetarism gained prominence in the 1970s, a decade characterized by high and rising inflation and slow economic growth. This was because it helped in bringing down inflation in the United States and the United Kingdom. According to investopedia, 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.
    While the monetarist theory was an important guide for the central bank policies, Friedman was opposed to the whole idea of central banks such as the Federal Reserve Bank in the united. He totally blamed them for the Great Depression of the 1930s arguing that the Federal Reserve Bank tightened the money supply at the very moment when they should have been expanding it in order to ensure economic growth and stability.
    Nevertheless, 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 QUANTITY THEORY OF MONEY

    Monetarists adopted the quantity theory of money from earlier economic theories and integrated into the general Keynesian framework of macroeconomics. The quantity theory of money states that the general price level of goods and services is directly proportional to the amount of money in circulation, or money supply. This theory was originally formulated by Polish mathematician Nicolaus Copernicus in 1517, but was popularized later by economists Milton Friedman and Anna Schwartz after the publication of their book.
      The quantity theory of money can be summarized in the equation of exchange, formulated by John Stuart Mill. This 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
    For further explanation, monetarists believe that a change in M (money supply) directly affects and determines employment, inflation (P), and production (Q). Normally, in the quantity theory of money, V is held to be constant. If V is constant, then an increase (or decrease) in M will lead to an increase (or decrease) in either P or Q.
    So also, 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
    Monetarism is the primary alternative macroeconomic theory to Keynesian economic theory. Monetarism stands in contrast to Keynesian economics theory in which monetarism expounded by Friedman concentrates on monetary policy while Keynesian economics focuses on fiscal policy.
    Monetarists believe in the extreme limited government economic intervention while Keynesian argue for active government participation and intervention.
    Keynes believed that the fiscal policy of the government such as increasing government spending is the key factor in stimulating an economy that is in recession. He believed tin active central bank and government intervention in the economy. Friedman didn’t agree to this rather he argued that the errant monetary policy of the Federal Reserve was a primary cause of the Great Depression in the 1930s. He believed that free markets self adjust in terms of prices and employment to provide the maximum benefit to the economy of a country.
    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.

    Conclusion
    Finally, monetarism became popular because of its simplicity and the impact it made and can make in ensuring or stimulating the growth of an economy. Monetarism, however, did not stand the test of time. The money demand function was found to be unstable. Accordingly, money supply targeting proved to increase interest rate volatility and, therefore, to destabilize the real economy. David Laidler, himself a leading monetarist, closed the book on monetarism in 1989: “The simple fact remains that a further 30 years of monetarist analysis has not been able to demonstrate the empirical existence of a structurally stable transmission mechanism between money and inflation to the satisfaction of its own practitioners, let alone its critics”.
    This does not mean that there is no usefulness, merits or advantages of monetarism. Some of its merits are they encourage higher levels of economic activities, they encourage a stable global economy, they promote lower inflationary rates, they create financial independence from government policies, they encourage private investments, etc.

  97. Avatar Ngwoke Chidera Lilian 2019/245394 says:

    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 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.
    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 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.
    How Money Supply Affects the Economy
    The central bank of a country can expand or contract the money supply through the manipulation of interest rates.

    For example, in the United States, the Federal Reserve can change the Fed Funds Rate – the interest rate at which banks can lend money overnight to other banks. The Fed funds rate affects all other interest rates in the economy.

    When the Fed funds rate is higher, interest rates increase overall. It decreases the amount of money lent to businesses and consumers, thus reducing spending and economic growth. Conversely, lowering interest rates increases borrowing by consumers and businesses, thus boosting spending and stimulating economic growth.

    The Underlying Equation
    There is an underlying equation that forms the foundation of the monetarist theory. It is known as the “equation of exchange” (also referred to as the “quantity theory of money”). Although the equation’s become quite complex due to its expansion and refinement by recent economists, the basic equation is expressed as follows:
    M 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 – GDP) and employment levels.
    The best monetary policy for a central bank to follow is to peg the money supply’s growth rate to match the rate of growth of real GDP – it is the best policy to support continuing economic growth and keep the rate of inflation relatively low.
    The last point is the key to the monetarist theory. Monetarist economists believe that the central bank’s manipulation of the money supply should be restricted. They believe that a central bank that more actively attempts to change the money supply is more likely to harm the economy than to benefit it.

    However, this contention may be heavily tied to the monetarists’ basic distrust of central banks as an institution. The idea runs counter to the Keynesian Economic Theory, which favors active, unrestricted intervention by the central bank.
    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 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 proRvide 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.
    Reference
    Investopedia
    Wikipedia
    Encyclopedia Britannica

  98. MACRO ECONOMICS ASSIGNMENT ON MONETARIST SYSTEM AND THEIR TENETS.

    Introduction:
    Monetary policy, one of 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.

    Today, monetarism is mainly associated with Nobel Prize – winning economist Milton Friedman. In his 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 1930s. In their view the failure of the Fed( as 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.

    The foundation of monetarism is the Quantity Theory of Money. 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).
    Equation of exchange; MV=PQ. Where M=money supply, V=velocity( rate at which money changes hands),P=average price of goods and services,Q=quantity of goods and services and services sold.

    Monetarists view velocity as generally stable,which implies that nominal income is largely a function of money supply.

    TENETS:
    A key point to note is that monetarists believe that changes to M(money supply) are the drivers of the equation. Hence,directly affects and determines employment,inflation(p) and production(q). Monetarists believe that the objectives of monetary policy are best met by targeting the growth rate of the money supply.
    Monetarists also believe:
    -The economy is self regulating
    -Changes in velocity and the money supply can change aggregate demand
    -Changes in velocity and the money supply will change the price level and Real GDP in the short run,but only the price level change in the long run.
    Through monetary policy,decisions are made about the volume of money in circulation or money supply as to whether or not it is too much or too little. The volume of money supply has a direct relationship with the level of prices of goods and services.

    AT ITS MOST BASIC
    The quantity theory of money is the basis for several key tenet s and prescription 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 effect on real factor s 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.

    Constant money growth rule: Milton 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% in a given year, the Fed should allow money supply to increase by 2%. 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 rate, 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.

    REFERENCE

    https://www.thisdaylive.com/index.php/2021/10/18/monetary-policy-in-challenging-times/
    https://www.thebalance.com/monetarism-and-how-it-works-3305866
    https://www.imf.org/external/pubs/ft/fandd/2014/03/basics.htm
    https://www.cbn.gov.ng/monetarypolicy/conduct.asp

    https://docs.google.com/document/d/1sLaqUxKhclOUaaIXV8jNxfzj3pJ-qBld/edit?usp=drivesdk&ouid=102149986094191484297&rtpof=true&sd=true

    • MACRO ECONOMICS ASSIGNMENT ON MONETARIST SYSTEM AND THEIR TENETS.

      Introduction:
      Monetary policy, one of 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.

      Today, monetarism is mainly associated with Nobel Prize-winning economist Milton Friedman. In his 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 1930s. In their view the failure of the Fed( as 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.

      The foundation of monetarism is the Quantity Theory of Money. 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).
      Equation of exchange; MV=PQ. Where M=money supply, V=velocity( rate at which money changes hands),P=average price of goods and services,Q=quantity of goods and services and services sold.

      Monetarists view velocity as generally stable,which implies that nominal income is largely a function of money supply.

      TENETS:
      A key point to note is that monetarists believe that changes to M(money supply) are the drivers of the equation. Hence,directly affects and determines employment,inflation(p) and production(q). Monetarists believe that the objectives of monetary policy are best met by targeting the growth rate of the money supply.
      Monetarists also believe:
      -The economy is self regulating
      -Changes in velocity and the money supply can change aggregate demand
      -Changes in velocity and the money supply will change the price level and Real GDP in the short run,but only the price level change in the long run.
      Through monetary policy,decisions are made about the volume of money in circulation or money supply as to whether or not it is too much or too little. The volume of money supply has a direct relationship with the level of prices of goods and services.

      AT ITS MOST BASIC
      The quantity theory of money is the basis for several key tenet s and prescription 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 effect on real factor s 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.

      Constant money growth rule: Milton 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% in a given year, the Fed should allow money supply to increase by 2%. 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 rate, 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.

      REFERENCE

      https://www.thisdaylive.com/index.php/2021/10/18/monetary-policy-in-challenging-times/
      https://www.thebalance.com/monetarism-and-how-it-works-3305866
      https://www.imf.org/external/pubs/ft/fandd/2014/03/basics.htm
      https://www.cbn.gov.ng/monetarypolicy/conduct.asp

      https://docs.google.com/document/d/1sLaqUxKhclOUaaIXV8jNxfzj3pJ-qBld/edit?usp=drivesdk&ouid=102149986094191484297&rtpof=true&sd=true

  99. Avatar John Blessing Rosemary says:

    Many people Denys the fact that money 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 determinate of the current GDP in the short run and the price level over longer periods. Today, the government use monetary policy to affect the overall performance of the economy. A theory formed by the monetarist which is known as monetarist theory, as advanced by Milton Friedman, state 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. An equation that forms the foundation of the monetarist theory is known as equation of exchange also referred to as the quantity theory of money. The equation is expressed as follows:
    M×V=P×Q
    Where M is money supply
    V is the velocity of money
    P is the average price level for transaction in the economy
    Q is the quantity of goods and services produced.
    According to the monetarist, V is relatively stable. Therefore, it changes M that primarily affects prices and Economic production.

    Tenets of monetarism are as follows:
    Long-run monetary neutrality: An increase in the money stock would be followed by an increase in the general price level in the long-run, with no effects on real factors such as consumption or output.
    2. Short run monetary non neutrality: An Increase in stock of money has temporary effects on real output (GDP) and employment in the short run because wages and prices take time to adjust.
    3. Constant money growth rule: Friedman, who died in 2006, proposed a fixed monetary rule, which States that the fed should be required to target the growth rate of money to equal the growth rate of real GDP, leaving the price level unchanged.
    4. Interest rate flexibility: the money growth rule was intended to allow interest rates, which affect the cost of credit, to be flexible to enable borrowers and lenders to take account of expected inflation as well as the variations in real interest rates.

  100. Avatar Ugwoke Michael-Mary Ikechukwu says:

    2019/248716

    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.

  101. Avatar AMANKWE UBACHUKWU VICTOR REG NO: 2019/242928 says:

    UNDERSTANDING MONETARISM AND THE MONETARISTS SYSTEM

    What Is Monetarism?
    Monetarism is a macroeconomic theory which states that governments can foster economic stability by targeting the growth rate of the money supply. Essentially, it is a set of views based on the belief that the total amount of money in an economy is the primary determinant of economic growth. Monetarism is 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 non monetarist analysis.

    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.

    Father of Monetarism
    Milton Friedman was one of the leading economic voices of the latter half of the 20th century and popularized many economic ideas that are still important today. Friedman’s economic theories became what is known as monetarism, which refuted important parts of Keynesian economics.

    The Effectiveness of Monetarism in Nigeria
    On the overall, monetary policy explain 98% of the changes in economic growth in Nigeria. Thus, the study concluded that monetary policy can be effectively used to control Nigerian economy and thus a veritable tool for price stability and improve output.

    Advantages of Monetarism
    1. It can bring out the possibility of more investments coming in and consumers spending more.
    In an expansionary monetary policy, where banks are lowering interest rates on loans and mortgages, more business owners would be encouraged to expand their ventures, as they would have more available funds to borrow with affordable interest rates. Plus, prices of commodities would also be lowered, so consumers will have more reasons to purchase more goods. As a result, businesses would gain more profit while consumers can afford basic commodities, services and even property.
    2. It allows for the imposition of quantitative easing by the Central Bank.
    The Federal Reserve can make use of a monetary policy to create or print more money, allowing them to purchase government bonds from banks and resulting to increased monetary base and cash reserves in banks. This also means lower interest rates and, eventually, more money for financial institutions to lend its borrowers.
    3. It can lead to lower rates of mortgage payments.
    As monetary policy would lower interest rates, it would also mean lower payments home owners would be required for the mortgage of their houses, leaving homeowners more money to spend on other important things. It would also mean that consumers will be able to settle their monthly payments regularly—a win-win situation for creditors, merchandisers and property investors as well!
    4. It can promote low inflation rates.
    One of the biggest perks of monetary policy is that it can help promote stable prices, which are very helpful in ensuring inflation rates will stay low throughout the country and even the world. As inflation essentially makes an impact on the way we spend money and how much money is worth, a low inflation rate would allow us to make the best financial decisions in life without worrying about prices to drastically rise unexpectedly.
    5. It promotes transparency and predictability.
    A monetary policy would oblige policymakers to make announcements that are believable to consumers and business owners in terms of the type of policy to be expected in the future.
    6. It promotes political freedom.
    Since the central bank can operate separately from the government, this will allow them to make the best decisions based upon how the economy is performing doing at a certain point in time. Also, the banks would operate based on hard facts and data, rather than the wants and needs of certain individuals. Even the Federal Reserve can operate without being exposed to political influences.

    Disadvantages of Monetarism
    1. It does not guarantee economy recovery.
    Economists who criticize the Federal Reserve on imposing monetary policy argue that, during recessions, not all consumers would have the confidence to spend and take advantage of low interest rates, making it a disadvantage.
    2. It is not that useful during global recessions.
    Proponents of expansionary monetary policy state that even if banks lower interest rates for consumers to spend more money during a global recession, the export sector would suffer. If this is the case, export losses would be more than what commercial organizations could earn from their sales.
    3. Its ability to cut interest rates is not a guarantee.
    Though a monetary policy is said to allow banks to enjoy lower interest rates from the Central Bank when they borrow money, some of them might have the funds, which means that there would be insufficient funds that people can borrow from them.

    4. It can take time to be implemented.
    With things expected to be done immediately in these modern times, implementing a monetary can certainly take time, unlike other types of policies, such as a fiscal policy, that can help push more money into the economy faster. According to experts, changes that are made for a monetary policy might take years before they begin to take place and make changes felt, especially when it comes to inflation.

    5. It could discourage businesses to expand.
    With this policy, interest rates can still increase, making businesses not willing to expand their operations, resulting to less production and eventually higher prices. While consumers would not be able to afford goods and services, it would take a long time for businesses to recover and even cause them to close up shop. Workers would then lose their jobs.
    Monetary policy is used in to help keep economic growth and stability, but there is no guarantee that it would always help society, considering that it also has its own set if drawbacks. Based on the ones listed above, what do you think?

    Understanding Monetarists
    Monetarists are individuals who believe in and embrace the theory of monetarism. Monetarists also believe that the money supply is the guiding force in economic development. As such, monetary policies.
    Monetarism promotes utilization of monetary policies to control demand in the economy, inflation/deflation and overall economic growth.
    The theory sprang to prominence in 1970s when the United States and other countries struggled with excessive inflation. Conventional economic theories like the Keynesian concept struggled to offer solutions to stagnant growth and rising prices.
    For example, with a decrease in the interest rate initiated by the central bank, there tends to be an increase in the money supply as it is easier to borrow money. As a result, people can access money easily. Subsequently, purchasing power increases, and national output increases momentarily.

    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.

  102. Avatar Chinedu chinedu Frank (2016/237287) says:

    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.

  103. Avatar Chinedu chinedu Frank (2019/237287) says:

    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.

  104. Avatar Eze kingsley okechukwu (2019/247766) says:

    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.

  105. Avatar Ikpeama chidubem Emmanuel (2019/243302) (economics/psychology) says:

    Firstly, 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
    Also, 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.
    Understanding Monetarism
    Monetarism is an economic school of thought which states that the supply of money in an economy is the primary driver of economic growth. As the availability of money in the system increases, aggregate demand for goods and services goes up. An increase in aggregate demand encourages job creation, which reduces the rate of unemployment and stimulates economic growth
    Monetary policy, an economic tool used in monetarism, is implemented to adjust interest rates that, in turn, control the money supply. When interest rates are increased, people have more of an incentive to save than to spend, thereby reducing or contracting the money supply. Contrarily, when interest rates are lowered following an expansionary monetary scheme, the cost of borrowing decreases, which means people can borrow more and spend more, thereby stimulating the economy.
    History of Monetarism
    Monetarism gained prominence in the 1970s, a decade characterized by high and rising inflation and slow economic growth. The policies of monetarism were responsible for bringing down inflation in the United States and the United Kingdom. After U.S. inflation peaked at 20% in 1979, the Fed switched its operating strategy to reflect monetarist theory. During this time period, economists, governments, and investors eagerly jumped at every new money supply statistic.
    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).\
    Conclusion
    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

  106. Avatar Nnaji kelechi 2019/245744 says:

    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).

  107. Avatar MACHEBE CHIOMA STEPHANIE says:

    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 thenvery 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 spoused 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.

  108. Avatar MACHEBE CHIOMA STEPHANIE says:

    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.

  109. Avatar Okpe Valentina Chioma. 2019/242325 says:

    The term monetarist is used to refer to an economist who values the theory that the overall money supply plays a primary role in affecting the demand in an economy. Furthermore, a monetarist believes that the regulation of the money supply can impact the performance of an economy. The foundation of such a belief comes from the idea that the regulation of the money supply allows for the regulation and control of inflation.
    One fundamental aspect or facet of monetarism is the equation of exchange. Monetarists believe that an increase in the money supply at a constant velocity will result either in an increase in the average prices of goods and services or an increase in the quantity of goods and services being produced.

    Exchange of Equation
    M*V= P*Q

    Where:

    M – Money supply
    V – Money turnover velocity
    P – Average price levels
    Q – Total quantity of goods and services produced

    Furthermore, monetarists argue that in order to encourage economic growth and stability, governments should increase the money supply with a steady annual rate, which should be linked to the expected growth in the gross domestic product (GDP). The rate should be quoted as a percentage.

    Constant growth in the money supply (in theory) would result in low inflation and steady economic growth. However, the theory was proven to be inaccurate during the 1980s, as developments in bank product offerings made it challenging for economists to calculate money supply, with savings being an important variable in its computation.

    Department: Library and information science
    Faculty: Education

  110. Avatar Arinze modester nmesoma says:

    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

  111. Avatar Amaechi Emmanuella Athanasius says:

    WHAT IS MONETARISM?
    Monetarism as a school of thought in monetary economics explains the roles of government in controlling the amount of money in circulation.It lays emphasis on the use of monetary policy over fiscal policy to manage aggregate demand.Monetarism states that government can foster economic stability by targeting the growth rate of the money supply in the system.A monetarist is someone who believes an economy should be controlled predominantly by the supply of money.
    Monetary policy 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.Monetarists believes that central banks are more powerful than the government because they control the money supply in the economy.The central bank acts as banker to the government and I responsible for monetary policies. Monetarist tends to watch real interest rates rather than nominal rates because 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.
    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.
    FEATURES OF MONETARISM
    1.The money supply is the crucial determinant of economic activity in the short-run:It is the money supply that determines total spending, and therefore, output, employment and the price level. there is also a direct link between the money supply and the national income. That link is the constant velocity of money. The constant velocity is expressed as Y/M.As a result of the stability of monetary velocity, a change in the money supply will change total spending and national income by a predictable amount. The demand for money is a stable function of income.
    2.In the long-run the level of real national income is determined by the forces of demand and supply:This is based on the assumptions that prices and wages in all markets are inherently flexible. They rise in response to excess demand and fall in response to excess supply. If some prices are inflexible, the burden of their adjustments would fall on other products.the economy is usually at or near the full employment level where there is no involuntary unemployment.
    3.The monetarists hold that the economy is stable: The time lag involved is so large that contra cyclical monetary policy might actually have a destabilising effect on the economy. Fiscal policy has no place in the monetarist system. It does not affect the economy unless it is accompanied by changes in the money supply. So there is no need for fiscal policy as the same results can be achieved by monetary policy.However, to stabilise the economy and avoid inflation, Friedman advocates a steady and inflexible growth in the rate of money supply. When the money supply increases at the same rate as output, the national income grows without inflation.
    4. Expectations play an important role in the monetarist’s view:Every person whether he is a businessman, consumer or worker is capable of correctly anticipating the effects of his own and other persons’ actions. The monetarists hold that expectations are rational. “Decisions taken on the basis of such expectations will cause the anticipated future results to occur even more quickly, if not at once. Thus intelligent expectations are self- reinforcing and stabilising, so long as the government does not create false signals by erratic and irrational intervention.”
    THE QUANTITY THEORY OF MONEY:
    The quantity theory of money presents the theoretical basis for the proposition that the money supply is the most important factor in the determination of nominal income. The bedrock of the monetarist approach begins with the equation of exchange M × V = P × Y, where M is the money supply, V is velocity of money (the turnover rate of the money supply), P is the price level, and Y is real output. Therefore the equation of exchange is an identity; however, monetarists assume that velocity is stable in the short run and if this assumption is taken to the extreme fixed.
    Therefore, the equation of exchange is transformed to the quantity theory of money as
    : M × V̄ = P × Y, where V̄ denotes velocity as fixed. The equation here states that changes in the money supply will affect nominal income, P × Y. Moreover, monetarists would contend that changes in the money supply cause changes in nominal income.With regards to the long run consequences associated with changes in the money supply, monetarists believe that the economy is always operating near or at full employment determined by the markets for labor, capital, and technology. Indeed, if the economy is operating at its potential, the quantity theory of money in the long run can be stated as follows: M × ∆ = P × YP, where YP denotes potential real output. Thus, the long run changes in the money supply will only affect the price level.
    While the changes in the money supply will only affect the price level in the long run, In the short run changes in money will have real effects. Monetarists affirms that in the short run, changes in the money supply can influence real variables such as output and employment.

    KEYNESIAN VERSUS MONETARIST ECONOMY:
    Keynesianism lays the emphasis on the role that fiscal policy can play in stabilising the economy. Precisely Keynesian theory suggests that higher government spending in a recession can help enable a quicker economic recovery. Keynesians say it is a mistake to wait for markets to clear as classical economic theory suggests. WhileMonetarism emphasises the importance of controlling the money supply to control inflation. Monetarists are generally critical of expansionary fiscal policy arguing that it will cause just inflation or crowding out and therefore not helpful.
    Principles of Keynesianism:
    In a recession/liquidity trap, government intervention can stimulate aggregate demand and real output through government borrowing and higher government spending. Therefore Keynesians advocate expansionary fiscal policy in a recession.
    Keynesians reject the theory of crowding out presented by Monetarists. Keynesians say that if there is a sharp rise in private sector saving (and fall in spending), government spending can offset this decline in private sector spending.
    Paradox of thrift. A key element in Keynesian theory is the idea of a ‘glut’ of savings. Keynes argued in a recession, people responded to the threat of unemployment by increasing saving and reducing their spending. This was a rational choice, but it contributes to an even bigger decline in AD and GDP. This is why government intervention may be needed.
    Keynesians usually believe there is a degree of wage rigidity. In a recession, Keynes said wages might be ‘sticky downward’ as unions resist nominal wage cuts, and this can lead to real wage unemployment.
    In a recession, when an economy has spare capacity, increasing aggregate demand (AD) will have an impact on real output and only minimal effect on the price level.
    Keynesians believe there is often a multiplier effect. This means an initial injection into the circular flow can lead to a bigger final increase in real GDP.
    Generally, Keynesians are more likely to stress the importance of reducing unemployment rather than inflation.
    Keynesians reject real business cycle theories (an idea that the government can have no influence over the economic cycle)

    Principle of monetarism
    Monetarist Theory, which was created by economist Milton Friedman, criticized the shortcomings of the Keynesian Theory. The primary flaw, in Monetarist thinking, is the effectiveness of government spending to drive aggregate demand.Friedman and Monetarist economists focus on keeping inflation low and stable by controlling the money supply. In their view, the greatest danger to an economy is when the money supply falls either too low or rises too high for the given economic environment.For example, in times when inflation is too high, the money supply should be decreased. With less money circulating, supply and demand principles will bring inflation back down to lower levels. In the opposite scenario, like in the instance of a liquidity crisis, Monetarists think the monetary base should be expanded to prevent a damaging deflationary spiral. As a result in both cases, interest rates will move to appropriate levels to either encourage or discourage borrowing, keeping aggregate supply and aggregate demand in balance.
    The key difference of both theories is that Monetarists do not think that government spending is the best path to economic stability. Instead, they emphasize inflation.Monetarists are more critical of the ability of fiscal policy to stimulate economic growth.Monetarists /classical economists believe wages are more flexible and likely to adjust downwards to prevent real wage unemployment.Monetarists stress the importance of controlling the money supply to keep inflation low.Monetarists more likely to place emphasis on reducing inflation than keeping unemployment low.

    CRITICISM OF MONETARY ECONOMIC SYSTEM
    The implementation of monetary policy tools does not guarantee results. People and businesses have free will. They can choose to initiate more spending when rates are lowered, or they might choose to hold onto their cash. Consumers don’t take out loans because the interest rates are down all the time. 100% of households don’t buy or refinance their home. There will always be outliers in every economy which respond in unpredictable ways. If enough entities do this, then the results of the monetary policy tools could be different than what was expected.The United States operates on budget estimates which account for 10 years of activity. Some countries can evaluate changes in half that time, while others use cycles that last for 20-40 years instead. Because currencies are not based on the scarcity of precious metals at this time, the tools must change the overall market to initiate economic shifts instead. Some changes take several years to start creating positive results. They can slow production.Economies are fueled by production. When more of it becomes available, then the chances for growth increase. If fewer activities occur, then production levels slow, and it could be several years before they can restore themselves to previous levels. Monetary policy tools try to give everyone the same chance at success. The reality of any financial market, however, is that any shift in policy will create economic winners and losers. These tools try to limit the damage to the people who struggle under the changes made while enhancing the benefits of those who see currency gains.
    Finally They do not offer localized supports or value.Monetary policy tools are only useful from a general sense. They affect an entire country with the outcomes they promote. There is no way for them to generate a local stimulus effect. If a community struggles with unemployment, they might need more stimulus to counter the issue. The current design of monetary policy tools doesn’t allow this to happen. The tools are unable to be directed at specific problems, boost
    In conclusion Monetarists are certain the money supply is what controls the economy, as their name implies. They believe that controlling the supply of money directly influences inflation and that by fighting inflation with the supply of money, they can influence interest rates in the future.

  112. 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

  113. Avatar Diugwu Salvation Nmesoma; 2019/242289 says:

    School :University of Nigeria nsukka (unn)
    Falculty: Faculty of education
    Department: Department of social science education
    Unit: education/ Economics .
    course code: ECO 204 (Macro economics Ii)
    Name: Diugwu Salvation Nmesoma
    Reg. No: 2019/242289
    Date : 13th February 2022

    Meaning of monetarism.
    Monetarism is an economic school of thought that stresses the primary importance of the money supply in determining nominal GDP and the price level. The “Founding Father” of Monetarism is economist Milton Friedman. Monetarism is a theoretical challenge to Keynesian economics that increased in importance and popularity in the late 1960s and 1970s. In fact, the tide was so strong that in 1979 the Federal Reserve switched its operating strategy more in line with Monetarist theory, though they subsequently abandoned the strategy in 1982 for a number of reasons.
    The 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.(MacroWelcome:2004).

    The monetarists system
    Monetarism, school of economic thought 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 and other monetarists advocate a macroeconomic theory and policy that diverge significantly from those of the formerly dominant Keynesian school.
    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.Britannica, T. Editors of Encyclopaedia (2018, October 3)

    The tenents of the monaterist
    • 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.Finance & devepment (2014).

    Reference
    Britannica, T. Editors of Encyclopaedia (2018, October 3). monetarism. Encyclopedia Britannica. https://www.britannica.com/topic/monetarism.

    Finance & devepment (2014) What Is Monetarism?https://www.imf.org/external

    MacroWelcome (2004).Introduction to macro economics http://www.econweb.com/MacroWelcome/monetarism.

  114. Avatar Ogbonna Mmesoma Rita says:

    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.

  115. Avatar Ugwu Sandra Amarachi. REG NO:2019/251531 says:

    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.
    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.
    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.

  116. Avatar Odo linda Amarachi says:

    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.

  117. Avatar Odo Linda Amarachi says:

    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 output

  118. Avatar Odum precious naomi says:

    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.

  119. Avatar Oboko Mmesoma Favour says:

    Reg no:2019/241347
    Course:ECO 204(MACRO ECONOMICS)
    Topic: Understanding Monetarism and Monetarist system
    The word mornetarism gained it’s prominence in the year 1970s characterized by high and rising inflation and slow economic growth. The founder of mornetarism is an American economist, Milton Friedman who is generally regarded as monetarism’s leading exponent.
    Monetarist theory is a contends of an economic concept that changes money supply as the most significant determinants of the rate of economic growth and behavior of the business cycle. Monetarism is an economic theory that sees money supply as the most important driver of economic growth. When money supply increases, people demand more , factories produce more and creating jobs. It is believed that central banks are more powerful than the government because they control the money supply. This is because they tends to watch real interest rates than normal rate. Most published rates are normal rate while real rates remove the effects of inflation.
    Money supply has become less useful in measuring liquidity. Money does not measure other assets like stocks, commodities and how equity. People are more likely to save money by investing in the stock market because of better return. Interest rate decreases as money supply expands . This is due to bank having more to lend, so they are willing to charge lower rates. That will lead to more borrowings for items in the house, automobiles and furniture thereby decreasing money supply, raise interest rate and makes loan more expensive. This slows the economic growth of a country.
    Federal government reduces inflation by raising the federal funds rate or decreasing the money supply. This is called contractionary monetary policy. The economy must not be tipped into recession. To avoid recession and resultant unemployment the federal government must lower their funds rate and increase the money supply. This is expansionary monetary policy.
    There are several basic key tenets and prescriptions of Monetaris;
    *Short-run Monetary Neutrality: A little or more increase in the money stock lead to temporary effects on real output (GDP) and employment in the short-run. This is because wages and price takes time to adjust.
    *Long-run Monetary Neutrality: Increase increase in the stock for money is followed by an increase in general price level with no effect s on real factors such as output.
    Interest Rate flexibility: The rule for money growth was to allow interested rate to be flexible to enable borrowers and lenders to take account of expect inflation with the variation in the real interest rates.
    *Constant Money Growth Rule : This states that federal government should target the growth rate of money to equal the growth rate of real GDP
    Monetarist system generally arose in reaction to Keynesian theory, the main stream school of economics which was based on the idea of the British economist John Maynard Keynes. A bluepoint had been propounded by Keynes for recovery from the Great Depression suggesting that government could stimulate them ailing economies by cutting taxes and spending money. Money spent would put money in people’s pockets. This leads to rising consumers demand which will give companies an initiative to expand their operations and have new workers which will increase demand. This shows the relationship between money supply and economic growth.
    Theoretical basis for monetarism is a mathematical equation known as the equation of exchange: MV=PQ.
    M: for money supply
    V: for velocity of money
    P: for level of prices in the economy
    Q: for quantity of goods and services in the economy
    MV accounts for all the money circulating in the economy and the speed in which it circulate.
    PQ accounts for the entire output of the economy. The above equation is linked to change in supply of money which either increases or decreases the change in average price of goods and services of a nation’s income.

  120. Avatar Uzochukwu Chidinma Vivian says:

    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.

  121. UNDERSTANDING MONETARISM AND MONETARISM SYSTEM
    Just as Democrats, Republicans, and others have different views on politics and public life, there are also different “parties” and schools of thought on economics and the economy. These schools of thought, like the political parties, have their leaders and their followers, and many of them, like “supply-side economics,” work their way indelibly into the political vernacular. Beyond such popular political panaceas, anybody who has spent time reading the papers or trying to understand this nebulous thing we call the economy has doubtless run into terms like “fiscal policy” and “Keynesian economics” and “monetary policy” and the “Chicago school’
    By congressional design or approval, governments can change the level and direction of spending quickly. As a first step in the recovery plan for what turned out to be the Great Recession, Congress passed the American Recovery and Reinvestment Act of 2009, providing more than $700 billion in new, “shovel￾ready” spending programs across the country. This is the largest and one of the most quickly passed fiscal stimulus packages in history. Fiscal stimulus programs like this are designed to provide jobs and thus stimulate aggregate economic demand by giving earners the ability to spend more money. Some stimulus packages are also designed to help certain parts of the economy (as opposed to the whole), or to strengthen or encourage specific sectors. The 2009 stimulus package, for instance, contained spending for alternative energy technologies. Some fiscal stimulus programs can help reduce the effects of poverty or accomplish other social or distribution-of-income objectives. Stimulus may also be accomplished by reducing taxes, as was done several times since the beginning of the Reagan administration in the early 1980s. The tax rebate checks sent to most Americans during 2008 and the 2 percent “holiday” on payroll taxes in effect for 2011 and 2012 were more recent examples. Fiscal policy can also be used dampen or attenuate an economy. This can occur either by reducing spending (difficult to do politically in the short run) or by raising taxes. Economists are somewhat split on the effectiveness of fiscal policies. As recently demonstrated, tax reductions and especially tax rebates during tough times can simply be used for saving and thus don’t stimulate the economy. Government spending increases and decreases can be very political. They may not be allocated to the greatest need but rather subject to intense lobbying, resulting in waste and a significant loss of time before the benefits are realized (even the rapidly passed 2009 law wasn’t expected to have real effect for as much as a year). For these reasons, many believe that monetary policy is more effective, but it has boundaries too. Notably, Congress controls fiscal policy while the Federal Reserve controls monetary policy. Most likely, a combination of the two works best, as has been deployed over the course of time.

    CHICAGO OR MONETARIST SCHOOL OF THOUGHT
    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.
    While John Maynard Keynes favored government intervention to smooth supply and demand for goods and services as a way to achieve economic growth and stability, another school of thought claimed that stability was a matter of equilibrium between supply and demand of money, not the goods and services themselves. This school of thought, largely held by members of the University of Chicago faculty, most notably Dr. Milton Friedman, is known as the Chicago or Monetarist school.
    Monetarism focuses on the macroeconomic effects of the supply of money, controlled by the central banks. Price stability is the goal, and policies like Keynesianism, which can lead to excessive monetary growth in the interest of stimulating the economy, are inherently inflationary. Monetarists hold that authorities should focus exclusively on the money supply. Proper money supply policy leads to economic stability in the long run, at the possible expense of some short-term pain. Monetarists are more laissez￾faire in their approach—that is, the economy is best left to its own actions and reactions. To the monetarist, money supply is more important than aggregate demand; the pure monetarist would increase money supply (in small, careful increments) to stimulate the economy rather than take more direct measures to stimulate aggregate demand. The Great Depression, in the Chicago school, was caused by a rapid contraction in money supply, brought on in part by the stock market crash, not a contraction in demand per se. To the monetarists, the more direct approaches to stimulating aggregate demand are considered irrevocable (once the government intervenes, it is difficult to disengage). Worse, they crowd out private enterprise as government thirst for borrowed money to fund stimulus makes it harder and more expensive for the private sector to borrow. Monetarists also suggest that Keynesian stimulation changes only the timing and source but not the total amount of aggregate demand.
    The monetarist point of view has always been embraced by policymakers who endorse a tight vigil over money supply in addition to more traditional fiscal stimulus and interest rate intervention. Fed Chairman Paul Volcker, and later Alan Greenspan, were monetarists, although critics are quick to point out that Greenspan got carried away and created too much growth in money supply, which led to strong boom and bust cycles in stocks and later in real estate. It did not lead to the expected inflation, thanks in part to the availability of inexpensive goods from Asia. We got lucky, but this attenuation of inflation may be unsustainable, particularly with the recent growth in money supply used to mitigate the Great Recession.
    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.
    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.
    AT ITS MOST BASIC
    The foundation of monetarism is the Quantity Theory of Money. The theory is an accounting identity—that is, it must be true. It says that the money supply multiplied by velocity (the rate at which money changes hands) equals nominal expenditures in the economy (the number of goods and services sold multiplied by the average price paid for them). As an accounting identity, this equation is uncontroversial. What is controversial is velocity. Monetarist theory views velocity as generally stable, which implies that nominal income is largely a function of the money supply. Variations in nominal income reflect changes in real economic activity (the number of goods and services sold) and inflation (the average price paid for them). The quantity theory is the basis for several key tenets and prescriptions of monetarism:
    • Long-run monetary neutrality: An increase in the money stock would be followed by an increase in the general price level in the long run, with no effects on real factors such as consumption or output.­
    • Short-run monetary nonneutrality: An increase in the stock of money has temporary effects on real output (GDP) and employment in the short run because wages and prices take time to adjust (they are sticky, in economic parlance).­
    • Constant money growth rule: Friedman, who died in 2006, proposed a fixed monetary rule, which states that the Fed should be required to target the growth rate of money to equal the growth rate of real GDP, leaving the price level unchanged. If the economy is expected to grow at 2 percent in a given year, the Fed should allow the money supply to increase by 2 percent. The Fed should be bound to fixed rules in conducting monetary policy because discretionary power can destabilize the economy.­
    • Interest rate flexibility: The money growth rule was intended to allow interest rates, which affect the cost of credit, to be flexible to enable borrowers and lenders to take account of expected inflation as well as the variations in real interest rates.­
    Many monetarists also believe that markets are inherently stable in the absence of major unexpected fluctuations in the money supply. They also assert that government intervention can often destabilize the economy more than help it. Monetarists also believe that there is no long-run trade-off between inflation and unemployment because the economy settles at long-run equilibrium at a full employment level of output.
    Money Supply
    Monetarism has recently gone out of favor. Money supply has become a less useful measure of liquidity than in the past. However, the money supply does not measure other assets, such as stocks, commodities and home equity. People are more likely to save money by investing in the stock market because they receive a better return. That means the money supply does not measure these assets. If the stock market rises, people feel wealthy and are inclined to spend more. An increase in spending increases demands, which boosts the economy. Stocks, commodities and home equity created economic booms that the Fed (the Federal Reserve) ignored. The Great Recession was fueled in part by the creation of a housing market bubble (home values rising, loans being approved for people who couldn’t afford them, and money being made by investors on the loans), which burst and took much of the economy with it.
    How does it operate?
    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.
    CHARACTERISTICS OF MONETARISM
    Monetarism is a mixture of the most important ideas and policy implications and explain them below.
    The theoretical foundation is the Quantity Theory of Money.
    The economy is inherently stable. Markets work well when left to themselves. Government intervention can often times destabilize things more than they help. Laissez faire is often the best advice.
    The Fed should be bound to fixed rules in conducting monetary policy. They should not have discretion in conducting policy because they could make the economy worse off.
    Fiscal Policy is often bad policy. A small role for government is good.
    MONETARISM IN TODAY’S WORLD
    Monetarism rose to prominence in the 1970s, especially in the United States. During this time, both inflation and unemployment were increasing, and the economy was not growing. Paul Volcker was appointed as chair of the Federal Reserve Board in 1979, and he faced the daunting task of curbing the rampant inflation brought on by high oil prices and the Bretton Woods system’s collapse. He limited the money supply’s growth (lowering the “M” in the equation of exchange) after abandoning the previous policy of using interest rate targets. While the change did help the inflation rate drop from double digits, it had the added effect of sending the economy into a recession as interest rates increased. Since monetarism’s rise in the late 20th century, one key aspect of the classical approach to monetarism has not evolved: The strict regulation of banking reserve requirements. Friedman and other monetarists envisioned strict controls on the reserves held by banks, but this has mostly gone by the wayside as deregulation of the financial markets took hold and company balance sheets became ever more complex. As the relationship between inflation and the money supply became looser, central banks stopped focusing on strict monetary targets and more on inflation targets. This practice was overseen by Alan Greenspan, who was a monetarist in his views during most of his near-20-year run as Fed chair from 1987 to 2006.
    CRITICISMS OF MONETARISM
    Economists following the Keynesian approach were some of the most critical opponents to monetarism, especially after the anti-inflationary policies of the early 1980s led to a recession. Opponents pointed out that the Federal Reserve failed to meet the demand for money, which resulted in a decrease in available capital. Economic policies, and the theories behind why they should or shouldn’t work, are constantly in flux. One school of thought may explain a certain time period very well, then fail on future comparisons. Monetarism has a strong track record, but it is still a relatively new school of thought, and one that will likely be refined further over time.

  122. Avatar NNAJI LOVELYN CHINWE. 2019/247502 says:

    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.

  123. Avatar EMUKA CHIDERA FAVOUR 2019/246077 says:

    MONETARIST MACRO ECONOMICS SYSTEM
    Monetarist is a macro economic theory which states that government can foster economic stability by targeting the growth rate of the money supply.Basically,it is a set of views based on the belief that the total amount of money in an economic 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 came to limelight in the 1970’s,a decade characterised 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 peaked at 20% in 1979,the Federal Government switched its operating strategy to reflect monetarist theory.During this time period,economist,governor and investor eagerly jumped at every new money supply.
    In the year that followed, monetarism fell out of favour with many economist as the look betweens different measures of money supply and inflation proved to be less clear than most monetarist theme had suggested.
    The supply of money in an economic is he main force of economic growth.As the availability for money increases,the Aggregate demand for good and services also increases there by encouraging job creation which tends to reduce the rate of unemployment and stimulates economic growth.
    One of the toools used in monetarism is monetary policy.Monetary policy is the policy adopted by the monetary authority which can either be the government or central bank of a Nation to control either the interest rate payable for very short term beginning or the money supply,it offers an attempt to reduce inflation or the interest rate,to ensure price stability and general trust of the value and stability of the nation’s currency.
    Monetary policy is implemented to adjust interest rates, that is turn, control the money supply,when interest rates,that in turn controls the money supply,when interest are increased, people have more of an incentive to save than to spend,thereby reducing or contracting the money supply.
    Monetarism is closely related to Milton Friedman,who argued based on the quantity of money that the government should keep the money supply fairly steady, expanding slightly each year to allow the natural growth of the economy.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.
    Monetarism adopted from earlier economic theories and integrated into the general Keynes in framework of macroeconomics.The quality theory of money can be summarized in the equation of exchange,formulated by John Staurt Mill,which states that the money supply multiplied by the rate at which money is spent per year,equal the nominal expenditure in the economy.The Formula as stated below
    M=Money Supply
    V=Velocity
    P=Average price of goods or services
    Q=Quantity of goods and services sold
    A key point believes that changes to M is the driver of equation.
    Monetarism also builds on the keynessian theory by assuming the same macro economic theory framework integrating the equation of exchange but instead focuses on the role played by money supply.
    Although,most modern economist reject the emphasis on money growth that monetarist purported in the past.One of the most important of these idea is that inflation cannot continue indefinitely without increase in the money supply.
    Proponent of monetarism generally believed that controlling an economy through fiscal policy is a poor decision because it necessarily introduce macro economics distortion that reduces economic efficiency.They prefer monetary policy as a tool to manage standpoint and that avoids the dead weight that fiscal policy creates in the market.
    In conclusion,it is the responsibility of the central bank to control inflation.

  124. Avatar Daniel Unique Agbenu says:

    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.

    price
    Home
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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.

  125. Avatar Omeje Sharon Amarachi says:

    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.
    A monetarist is a person who believe and work in accordance with monetarism which maintain that monoy supply is the main determinant of Economic growth.
    Key People: Margaret Thatcher
    economics quantity theory of money and money supply equation of exchange
    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.
    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 points
    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.
    Milton Friedman and Monetarism
    Monetarism is closely associated with economist Milton Friedman, who argued, based on the quantity theory of money, that the government should keep the money supply fairly steady, expanding it slightly each year to allow for the natural growth of the economy. Due to the inflationary effects that can be brought about by the excessive expansion of the money supply, Friedman, who formulated the theory of monetarism, asserted that monetary policy should be done by targeting the growth rate of the money supply to maintain economic and price stability.

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

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

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

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

    

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

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

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

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

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

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

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

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

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

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

  126. Avatar Oleh chimamanda orieoma says:

    NAME: OLEH CHIMAMANDA ORIEOMA
    REG NO: 2019/244935
    DEPARTMENT: ECONOMICS/PHILOSOPHY

    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.

  127. Avatar Opara kosisochukwu bright says:

    Name: Opara kosisochukwu bright
    Reg no: 2019/246081
    Department: social science education (Economics)

    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. 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.

    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.

    Furthermore, the total quantity of money in an economy is the basic measure yardstick to economic growth and development.
    Which means that money is the core base of every transaction in a country, generally acceptable.

  128. Avatar Clement Ann Amaka says:

    Name: Clement Ann Amaka
    Reg no: 2019/245757
    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.

  129. Avatar Ugwunze Emmanuel Chukwuebuka says:

    NAME: UGWUNZE EMMANUEL CHUKWUEBUKA
    REG NO: 2019/245483
    DEPARTMENT: ECONOMICS
    MONETARIST ECONOMY
    Monetarism attracted significant support during the 1960s, 70s and early 80s, when the economy experienced high rates of unemployment and inflation. Remember this was after the Phillip’s Curve (1950s) theory (which was Keynesian) – that unemployment could be “cured” with inflation.The challenge to the traditional Keynesian theory strengthened during the years of stagflation in the 1970s. Keynesian theory had no appropriate policy responses to stagflation. 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. Remember that the early Keynesians emphasized fiscal policy over monetary policy (due to the liquidity trap). But after the influence of the monetarists, Keynesians began paying more attention to monetary policy as a tool.Basic Ideas (they brought the Classical School of economics back to the forefront – at least some of it): 1. Both short-run and long-run oriented 2. Markets are basically self-correcting and stable. Keynesian economics overstates the amount of macroeconomic instability in the economy. In particular, Friedman argued, that the economy will ordinarily be at potential real GDP.3. Focus is on money and inflation rather than unemployment because of similar arguments the Classical economists gave (quantity theory of money). Although they agree with Keynes that money wages will not always adjust
    quickly.
    4. Government intervention can often times destabilize things more than they help. In fact, most instability is caused by changes in the money supply.

    The Depression – argued that Keynes was wrong: The most fluctuations in real output were caused by fluctuations in the money supply rather than by fluctuations in consumption or investment spending. Friedman and Schwartz (in their book) argued that the severity of the Great Depression was caused by the Federal Reserve’s allowing the quantity of money in the economy to fall by more than 25 percent between 1929 and 1933. Argue that the Quantity Theory of Money is correct (Keynes was wrong). More specific evidence they use includes: In other words: Between 1929 and 1933 real GNP decreased 29.6% and nominal GNP decreased 46.0% and the aggregate price level decreased. At the same time M1 decreased 26.5% and M2 (M1 + bank deposits) decreased 33.3%. Generally, therefore MV = PQ (quantity theory of money) holds (M decreased and so did PQ). The Quantity Theory of Money Revisited:Remember the Classical school gave us an early version. Then in the early twentieth century – Irving Fisher (Yale economist – also famous in finance) – formalized the connection between money and prices by using the quantity equation:M x V = P x YM = V = P = Y = real outputHe defined velocity as: “the average number of times each dollar of the money supply is used to purchase goods and services included in GDP.”So he rewrote the equation – V = P x Y/M (just divided both sides by M to solve for V)Solving for velocity: So for example – if real output (the actual amount of production