Monetarism

1
Monetarism

• Economics
• Klein Oak High School

2
Basic Assumption

• quantity theory of money
• based on equation of exchange
• MV PQ
• M money stock
• V monetary velocity
• P price level
• Q quantity of goods (real GDP)

3
Other Assumptions

• Velocity (V) is constant
• or changes in predictable ways
• Money is neutral
• Changing M doesnt change Q.

4
Conclusion

• Changing M changes P

5
Policy Goal

• price stability
• because instability causes uncertainty
• recession and
• inflation

6
Policy Recommendation

• M should increase at constant rate
• enough to allow growth in economy
• need enough new dollars to buy increased supply
  of goods
• Generally, M should grow at about 3-4 per year.

7
Criticisms

• V isnt constant
• M can change Q
• Keeping M constant causes fluctuations in
  interest rates
• because the supply of money is half of what
  determines interest rates
• Its hard to measure M

8
Conclusions

• Dramatic changes in M can cause instability
• post WWI Germany
• Control of M does tend to stabilize prices
• in the long run

9
Gold Bugs

• a.k.a. hard money advocates
• believe the money supply should be tied to the
  supply of gold
• FED Chairman Alan Greenspan
• price of gold is a reliable measure of M times V
• If the price of gold is rising, we should slow
  monetary growth.