Monetarism Economics Klein Oak High School

Klein Oak High School
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)
Other Assumptions
 Velocity (V) is constant
 or changes in predictable ways
 Money is neutral
 Changing M doesn’t change Q.
 Changing M changes P
Policy Goal
 price stability
 because instability causes uncertainty
 recession and
 inflation
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.
 V isn’t 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
 It’s hard to measure M
 Dramatic changes in M can cause
 post WWI Germany
 Control of M does tend to stabilize prices
 in the long run
“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.
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