What Is Monetarist Theory?

The monetarist theory is an economic concept that contends that changes in money supply are the most significant determinants of the rate of 澳洲幸运5官方开奖结果体彩网:economic growth and the behavior of the business cycle. When m🌺onetarist theory works in practice, central banks, which control the levers of monetary policy, can exert much power over economic growth rates.

The theory that is competing with the monetarist theory is 澳洲幸运5官方开奖结果体彩网:Keynesian economics.

Understanding Monetarist Theory

According to monetarist theory, if a nation's supply of money increases, economic activity will increase—and vice versa.

Monetarist theory is governed by a simple formula: MV = PQ, where M is the money supply, V is the velocity (number of times per year the average dollar is spent), P is the price of goods and services and Q is the quantity of goods and services. Assuming constant V, when M is increased, either P, Q, or both P and Q rise.

General price levels tend to rise more than the production of goods and services when the economy is closer to 澳洲幸运5官方开奖结果体彩网:full employment. When there is slack🐟 in the economy, Q ꦯwill increase at a faster rate than P under monetarist theory.

In the U.S., the 澳洲幸运5官方开奖结果体彩网:Federal Reserve (Fed) sets monetary policy without government interference. The Fed operates on a monetarist theory that focuses on maintaining stable prices (low 澳洲幸运5官方开奖结果体彩网:inflation), promoting full employment, and achieving moderate interest rates.

Controlling Money Supply

💃 In the U.S., it is the job of the Fed to control the money🌳 supply. The Fed has three main levers:

• 澳洲幸运5官方开奖结果体彩网:The reserve ratio: The percentage of reserves a bank is required to hold against deposits. A decrease in the ratio enables banks to lend more, thereby increasing the supply of money.
• 澳洲幸运5官方开奖结果体彩网:The discount rate: The interest rate the Fed charges commercial banks that need to borrow additional reserves. A drop in the discount rate will encourage a bank to borrow more from the Fed and therefore lend more to its customers.
• 澳洲幸运5官方开奖结果体彩网:Open market operations: Open market operations consist of buying and selling government securities. Buying securities from large banks increases the supply of money, while selling securities contracts decreases the money supply in the economy.

Example of Monetarist Theory

Former Federal Reserve Chair 澳洲幸运5官方开奖结果体彩网:Alan Greenspan was a proponent of monetarist theory. During his initial years at the Fed in 1988, he increased 澳洲幸运5官方开奖结果体彩网:interest rates, decreasing growth and raising inflation ra💟tes, which almost touched 5%.

The U.S. economy tipped into recession during the early 1990s. In response, Chair Greenspan boosted economic prospects by commencing a rate-cutting spree that resulted in the longest period of economic expansion in the history of the U.S. economy. A loose 澳洲幸运5官方开奖结果体彩网:monetary policy of low interest rates made the U.S. economy prone to bubbles, culminating in the 2008 financial crisis and the 澳洲幸运5官方开奖结果体彩网:Great Recession.