Monetarism

Definition

Monetarism is an economic theory that emphasizes the role of governments in controlling the amount of money in circulation. It argues that changes in the money supply have major influences on national output in the short run and the price level over longer periods. This theory arose as a response to Keynesian economics, advocating for a stable monetary policy to foster economic stability.

5 Must Know Facts For Your Next Test

1. Milton Friedman was a key figure in developing monetarist theory, emphasizing that inflation is always a monetary phenomenon.
2. Monetarism gained prominence during the 1970s, particularly as a response to stagflation, which was characterized by high inflation and unemployment.
3. Monetarists argue that managing the growth of money supply is crucial for controlling inflation and promoting economic stability.
4. A key critique of monetarism is its assumption that changes in money supply have predictable effects on economic output and prices.
5. Central banks that adopt monetarist policies often focus on controlling inflation through interest rates and regulating money supply growth.

Review Questions

• How does monetarism contrast with Keynesian economics in terms of government intervention and economic stability?
  • Monetarism contrasts with Keynesian economics by advocating for limited government intervention and emphasizing the importance of controlling the money supply to ensure economic stability. While Keynesian economics supports active fiscal policies to stimulate demand, monetarists believe that managing the money supply is more effective in influencing inflation and output. This difference highlights fundamental debates about the best approaches to achieve macroeconomic stability.
• What role did Milton Friedman play in shaping monetarist theory, and how did his ideas influence economic policies in the late 20th century?
  • Milton Friedman was a leading figure in shaping monetarist theory, arguing that inflation is primarily caused by excessive growth in the money supply. His work influenced economic policies in the late 20th century, particularly during periods of high inflation when central banks began to adopt monetarist principles. Friedman's emphasis on stable monetary policy led to shifts in how central banks approached inflation control, favoring money supply management over fiscal intervention.
• Evaluate the impact of monetarism on modern economic policy and its relevance in addressing current economic challenges.
  • Monetarism has significantly impacted modern economic policy by reinforcing the importance of monetary stability and the management of money supply. Its principles remain relevant today as central banks grapple with challenges such as inflationary pressures and economic recovery post-crisis. The monetarist emphasis on controlling money supply continues to inform policy decisions, prompting debates on the effectiveness of traditional tools like interest rate adjustments versus more innovative approaches to monetary policy.

Related terms

Keynesian Economics: An economic theory suggesting that government intervention can stabilize the economy, particularly through fiscal policy and public spending.

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

Money Supply: The total amount of monetary assets available in an economy at a specific time, which is critical for determining inflation and economic growth.