Macroeconomics School of Thought

Macroeconomics School of Thought

Monetarism is a school of thought that emphasizes the role of the government in controlling money that is in circulation. The theory carries the belief that variations in the supply of money will have an influence on the national output as well as on the price levels over longer periods. The monetary school of thought believes that the objectives of the monetary policy can best be achieved by targeting the growth rate of the money supply instead of engaging in discretionary monetary policy (Akram-Lodhi 13).The monetary policy focuses on the effects of money supply and central banking on the macro economy and at the same time, it argues that excessive expansion of money supply serves inflation purposes and it also argues on the importance of maintaining the stability of prices in the market. The monetarist model is based on the base of solid micro foundations for institutions that facilitate the process of exchange.

Monetarism encompasses a body of research that focuses on the monetary theory as well as the monetary policy as well as major fundamental issues such as banking and financial mediation. Monetarism will also study the role of currency in the exchange process as well as the role of related financial institutions (Akram-Lodhi 18).Financial intermediation is a major aspect and this will be concerned with the diversification as well as the transformation of assets. The financial mediation theory is useful because it assists in creating an understanding of the potential of instability in the banking and financial system. Milton Friedman was the brain begins the monetarism theory and he managed to develop the theory at a global level. Friedman focuses on the role of money in economic processes and especially the importance of balance in the money market. Changes in the money stock have been raised in the motor of the economic processes and this is because of the applied monetary policy. Monetarism was developed as a direct reaction to Keynesianism and it was concerned with the long-term underestimation of money as well as monetary factors.

Pettinger, Tejvan. “Keynesian Vs Monetarist Theories.” Econ.economicshelp.org. N.p., 2018. Web. 27 Apr. 2018.

The success of this theoretical view was seen through the parallel with an increase in the number of crises in the economy especially during the 60s and the 70s.One major difference between monetarism theory and Keynesianism is the faith in the efficiency of self-regulating mechanisms in the market, which would then enable growth in production without any injections from the capital budget (Jahan, Mahmud and Papageorgiou 53).Keynesianism saw the capitalist economy as one which was unstable and would require systematic corrections. Monetarism, on the other hand, saw the cause of destabilization in state intervention and viewed the capitalist economy as a harmonic system. One major aspect of the monetarist theory is the theory of money and this is a construct of the demand for money as well as monetary policy as well as the mutual relationship between inflation and unemployment.

The Friedman theory consists of a component of ideas concerning the functioning of the market economy as well as how this is linked to economics. The theory has managed to reveal that the nominal quantity of money will often be determined by its supply. One central aspect of monetarism is the problem of inflation and this has been discussed in detail by Friedman (Jahan, Mahmud, and Papageorgiou54).Monetarism has some key assumptions and these dictate the theory in various aspects, One major aspect of the theory is that it relies on the predictability of velocity as opposed to absolute stability in market trends. Velocity has in the past been unstable with unpredictable periods in increases as well as in declines. Monetarists also assume that the variation in the supply of money supply will have major influences on the national output in the short run as well as in the price level over longer periods. Monetarism has many accurate aspects but there are questions concerning the logic behind this theory.

“Boyes/Melvin Solutions To Problem Sets.” College.cengage.com. N.p., 2018. Web. 27 Apr. 2018.

The monetarism theory fails to give a good account of spending, which is key. When the government deficit spends then this will create more net worth in the private sector. Various market run-ups will create new balance sheet assets and at the same time it will leave the collective stock of fixed price cash, unchanged (Ho-fung and Thompson 449).Monetarism is not very compatible with the Keynesian point of view especially in various areas such as the importance of the money supply. Keynesians will often argue that the Federal Reserve will use discretion in conducting the monetary policy and Monetarism will advocate for the long run growth of money. It will, therefore, be important to consider the shortcomings of monetarism as well as the effects that this would have on the economy both short and long-term.

Furthermore, Keynesian will argue that the aggregate supply curve is horizontal and not vertical in the end and therefore the stabilization policy will affect output and employment. On the other hand, monetarism will argue that the economy is inherently stable and will, therefore, view the aggregate supply curve as vertical, therefore undermining the importance of stabilization (Ho-fung and Thompson 460).Though monetarism has been successful in some countries, it would have various flaws which would have to be addressed. One major issue is the stability of the link between monetary aggregates and inflation. Monetarists consider the monetarist policy because it targets the growth of money supply. The monetarist policy can be relied on but the effects of this school of thought will take a while to reflect in the economy.