Milton Freeman Professor E Z Money

Milton Freeman was a monetarist. He felt the problems associated with crowding out and the complexity of fine tuning the economy with fiscal policy were the wrong way to go. Government should ease burdensome regulation to allow entrepreneurship to flourish. Labor unions should be curtailed so wages could be downwardly flexible. Further, if the Fed increased money supply at 3% a year, there would be liquidity to again allow entrepreneurship to flourish. The goals of economic growth and full employment and price stability could be attained through monetary policy.

Suppose that initially the economy is at the intersection of AD and SRAS, and the Fed decides to implement an expansionary policy to increase the level of employment Each year the Fed would continue to increase money supply. The expected rate of inflation would be 2 – 3 %, but its ok because the increase in output would be sustainable, instead of trying to live with zero inflation and no growth LRAS SRAS AD REAL GDP PRICE LEVEL LRAS 1 AD 1 AD 2 SRAS 1