1. Economics Klein Oak High School
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 Money is neutral
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.