1. Monetarism Economics Klein Oak High School

2. 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)

3. Other Assumptions • Velocity (V) is constant • or changes in predictable ways • Money is neutral • Changing M doesn’t change Q.

4. Conclusion • Changing M changes P

5. Policy Goal • price stability • because instability causes uncertainty • recession and • inflation

6. 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.

7. Criticisms • 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

8. Conclusions • Dramatic changes in M can cause instability • post WWI Germany • Control of M does tend to stabilize prices • in the long run

9. “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.