Monetarism

Definition

Monetarism is an economic theory that emphasizes the role of governments in controlling the amount of money in circulation. It posits that variations in the money supply have major influences on national output in the short run and the price level over longer periods. Monetarism became prominent in the late 20th century as an alternative to Keynesian economics, particularly in the context of the evolution of the international monetary system.

5 Must Know Facts For Your Next Test

1. Milton Friedman is one of the most notable economists associated with monetarism, arguing that controlling money supply is key to managing inflation.
2. Monetarists believe that excessive growth in money supply leads to inflation, while too little growth can result in unemployment and economic stagnation.
3. During the 1970s, monetarism gained traction as policymakers sought alternatives to address stagflation, a situation characterized by high inflation and high unemployment.
4. Monetarism has influenced central banks worldwide, leading to policies focused on controlling inflation through monetary policy rather than fiscal policy.
5. The debate between monetarists and Keynesians has shaped economic policies, particularly in times of economic crisis, influencing how governments respond to downturns.

Review Questions

• How does monetarism differ from Keynesian economics in its approach to managing economic fluctuations?
  • Monetarism differs from Keynesian economics primarily in its focus on the money supply as a central tool for managing economic fluctuations. While Keynesians advocate for government intervention through fiscal policies such as increased spending during recessions, monetarists argue that controlling the money supply is more effective for regulating inflation and stabilizing the economy. This shift in focus emphasizes long-term monetary policy over short-term fiscal measures.
• Discuss the implications of monetarism on the international monetary system since its rise in popularity during the late 20th century.
  • Since its rise to prominence, monetarism has significantly influenced the international monetary system by encouraging central banks to prioritize controlling inflation through monetary policy. This shift has led many countries to adopt inflation targeting as a key strategy, thereby impacting exchange rates and international trade dynamics. The emphasis on stable currency values has also contributed to greater financial stability globally, although it has sometimes conflicted with other economic goals such as full employment.
• Evaluate how the principles of monetarism can be applied to current global economic challenges, particularly regarding inflationary pressures.
  • The principles of monetarism can be applied to current global economic challenges by emphasizing the need for careful management of money supply to address rising inflationary pressures. Policymakers can utilize tools such as interest rates and open market operations to influence money circulation effectively. Additionally, by adhering to monetarist principles, central banks can maintain price stability while addressing economic growth needs, highlighting a balance that is crucial in today's complex global environment characterized by supply chain disruptions and fluctuating demand.

Related terms

Money Supply: The total amount of money available in an economy at a particular time, which includes cash, coins, and balances held in bank accounts.

Inflation: The rate at which the general level of prices for goods and services rises, eroding purchasing power.

Keynesian Economics: An economic theory advocating for increased government expenditures and lower taxes to stimulate demand and pull the global economy out of depression.