monetarism

What It Is

Monetarism is a well-known macroeconomic school of thought developed by Milton Friedman.

How It Works

The Great Depression and its resulting high unemployment greatly influenced the development of macroeconomics. In 1936, John Maynard Keynes published "The General Theory of Employment, Interest and Money," which theorized that government spending and tax policies could be used to stabilize economies. This Keynesian school of economic thought argues that an increase in government expenditures or a reduction in taxes will stimulate an economy; likewise, a reduction in government expenditures or an increase in taxes will constrict an economy and reduce inflation.

Later, Friedman developed another well-known macroeconomic school of thought called monetarism, which rejected Keynes's fiscal policy idea and stated instead that regulating the money supply was the key to economic stability. Friedman published several books on a variety of topics, but his most well-known is "Studies in the Quantity Theory of Money," published in 1956.

Why It Matters

Monetarists generally believe that inflation mostly depends on how much money the government prints. The idea is that when more money is available, more people will spend money, which increases demand for goods and services, which drives their prices up. Whether this is correct is the subject of decades of debate, and there is less controversy about whether the theories are right than there is about how much influence the government should have in any economy. Ultimately, the overall goal of monetarism is to maintain long-term economic prosperity or, more cynically, to promote an economy that is in line with the government's political goals.

Source: Investing Answers