Monetarist School of Economics

Submitted as per the requirement of the course curriculum of

“Foundation of Economics” in School of Law
 Acknowledgement

The present research work is a result of great efforts put by the researcher. However, it would not
have been possible without the kind support and help of many individuals. The researcher would
like to extend his/her sincere thanks to all of them.

Researcher is highly indebted to my subject teacher for his constant supervision and help in
understanding the complex subject of Foundation of Economics and providing necessary
information regarding the research paper and for support in completing the research work.

With profound gratitude

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 Monetarist School of Economics
INTRODUCTION
Monetarism is a school of thought in monetary economics which stress on the role played by the
government in handling the amount of money circulation. Monetarist theory asserts that variations
in the money supply have major influences on the national output in the short run and price levels
over longer periods. Monetarist economists tells that the objectives of the monetary policy are
better met by targeting the growth rate of the money supply rather than by involving in optional or
voluntary monetary policy.

Present monetarism is mainly linked 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 aka government policy. Milton had argues that
over expansion of money supply in the market is inherently inflationary.

Difference Between Monetarist Economics and Keynesian Economics

Monetarist economics is basically a direct criticism of Keynesian economics. Monetarist

economics involves in the control of money in the economy, while Keynesian economics involves
in government expenditures. Monetarist believe in controlling the supply of money that flows into
the economy , while allowing the rest of the market to fix itself. In contrast, Keynesian economists
believe that a troubled economy continues in a downward manner unless an intervention drives
consumers to buy more goods and services.

Breaking of Monetarist

Monetarism is an economic formula. It states that money supply multiplied by its velocity (the
rate at which money changes hands in an economy) is equal to nominal expenditures in the
economy (goods and services multiplied by price).

The formula for better understanding of monetarist theory is : MV=PQ , where M is money supply,
V is velocity, P is price of goods and services and Q is the quantity of goods and services.

Monetarist say velocity is generally stable, which is up for debate.

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Monetarist warns that increasing the money supply only provides a temporary boost to economic
growth and job creation. Over long term period it increases inflation, as demand outstrips supply,
prices rise.

Monetarists believe monetary policy is more effective than fiscal policy. That's government
spending and tax policy. Stimulus spending adds to the money supply, but it creates a deficit. This
adds to the country's sovereign debt. That will increase interest rates. Monetarists say that central
banks are more powerful than the government because they control the money supply.

Monetarists watch real interest rates rather than nominal rates. Most published rates are nominal
rates. Real rates remove the effects of inflation. They give a truer picture of the cost of money.

Today, monetarism has gone out of favor. That's because the money supply is a less useful measure
of liquidity than in the past. Liquidity includes cash, credit and money market mutual funds. Credit
includes loans, bonds, and mortgages. But the money supply does not measure other assets,
such as stocks, commodities and home equity. People are more likely to save money in the stock
market as money markets. They receive a better return.

That means the money supply does not measure these assets. If the stock market rises, people feel
wealthy. They are more willing to spend. That increases demand and boosts the economy.
These assets created booms that the Fed ignored. They led to the 2001 recession and the Great
Recession.