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Monetarism is a macroeconomic theory that deals with analyzing the money supply or slope of economic thinking that deals with the effects of money on the economy in general. Monetarism is identified with a particular interpretation of the way in which the supply of money affects other variables such as price, production and employment. It is the view in the monetary economy that changes in the money supply have great influence on the national product in the short term and on the level of prices in the long and that the objectives of the monetary policy are better obtained through the control of the Money supply. ”
Monetarism is an economic doctrine that studies the effects of changes in the money supply on the relevant economic variables (such as employment, prices or production).
Monetarism is based on the idea that an increase in the money supply, that is, the total cash and checks that circulates in the economy, will increase production in the short term and inflation in the long term.
The basic monetarist idea is to analyze together the total demand for money and the money supply. It is assumed that the economic authorities have the capacity and power to set the nominal money supply (without taking into account the effects of prices) because they control both the amount that is printed or coined as well as the creation of bank money; But individuals and businesses are free to make decisions about how much real cash they want to get.
Monetarism argues that while monetary authorities (central bank or others) have control of nominal supply, people base their decisions on the amount of real money they want to obtain / maintain.
In this way, when the money supply grows beyond what people want to maintain, they will seek to reduce their amount of money by buying goods or assets. With this behavior, greater availability of money would increase production in the short term. However, in the long run it is not possible to get rid of the excess supply of money (especially if the economy is close to its potential) so prices will adjust upwards.
Likewise, monetarism indicates that inflation is a purely monetary process caused by an increase in money circulation. Given the above, one of the tools the monetary authority has to control inflation is to manage the interest rate (which reflects the price of money). If there is fear of higher inflation, the interest rate should increase so that money is more expensive. On the contrary, in the face of possible deflation, the monetary authority must reduce the interest rate.
Monetarism defends the use of the market as a mechanism of allocation of resources and the application of a monetary policy that tends to balance between GDP and inflation.
Milton Friedman, Nobel laureate in economics in 1976 is one of the greatest exponents of monetarism. Among his main contributions related to modern monetarism are: permanent rent theory, a review of the Phillips curve (by the NAIRU rate) and the monetary rule.
According to Friedman’s interpretation of quantitative theory, both the velocity of circulation and the demand for money are, assuming that economic variables are in their relations or “natural levels”, stable in the short term, reflecting individual or institutional preferences About how much to save or consume. Variations in the amount of money then lead to attempts by companies and individuals to maintain these preferences, for example, getting rid of excesses of money (which means an increase in demand). But, crucially, a society can not, as a whole, get rid of such monetary excess, especially if society is at its natural levels of production and employment. As a result, prices will increase. Eventually we will reach a new break-even point, but that point will be at the new prices. Lack of circulating will give rise to the opposite process.
Friedman continued to try to elucidate the role that economic and monetary forces play in the economy in general and in employment in particular. Friedman suggests that economic equilibrium does not necessarily imply price stability, as earlier conceptions assumed, but rather that economic stability depends on anticipated variations that maintain “natural relations” between variables. For example, the natural level of unemployment (NAIRU) is one in which observed inflation is the same as expected.

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