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Monetarism |
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Monetarism A macroeconomic theory concerned with the sources of national income and the causes of inflation. The theory, proposed by and closely associated with Milton Friedman, states that the amount of money issued by a government should be kept steady, only allowing increases in the supply of money to allow for natural economic growth. Â Monetarism also states that the rate of inflation is directly determined by the supply of money available in an economy. Â Friedman believed that the government should be less focused on controlling the supply of money and more focused on maintaining price stability, a balance between monetary supply and demand. See: Economic growth rate, Monetarist Monetarism In economics, a theory stating that inflation results directly and exclusively from the expansion of a country's money supply. That is, if a government prints money, inflation will result. Monetarists believe that a government ought to set target interest rates to encourage or slow growth in the supply. For example, when an economy is growing rapidly, monetarists recommend raising interest rates. On the other hand, they recommend lowering interest rates in a recession. In general, however, monetarists recommend that a government maintain a relatively steady money supply, with an allowance for growth to keep up with GDP expansion. Many of its beliefs, notably the one on interest rates, are still commonly held, though many economists believe the relationship between money supply and inflation is more complex than monetarism theorizes. Milton Friedman is considered the father of modern monetarism.
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