Economics Klein Oak High School Monetarism Economics 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 Money is neutral or changes in predictable ways Money is neutral Changing M doesn’t change Q.

Conclusion 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.

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

Conclusions Dramatic changes in M can cause instability 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.