monetarism
An economic theory emphasizing the role of money supply in determining economic output and inflation, associated with Milton Friedman, arguing that controlling money supply is the key policy tool.
Example
“Monetarism influenced Paul Volcker's 1980s policy — control money supply growth to defeat inflation.”
Memory Tip
MONETARISM = control MONEY SUPPLY to control the economy. Milton Friedman's school of thought.
Why It Matters
Understanding monetarism helps you grasp how central bank decisions about money supply affect inflation, interest rates, and your purchasing power. When central banks increase or decrease the money supply, it directly impacts everything from mortgage rates to the cost of groceries, making this theory crucial for personal financial planning and investment decisions.
Common Misconception
Many people believe that monetarism means simply printing more money will always boost the economy, but the theory actually argues that excessive money supply growth primarily causes inflation rather than sustainable economic growth. Friedman emphasized that money supply should grow at a steady, predictable rate to avoid economic instability.
In Practice
If a central bank increases the money supply by 10 percent in a year when the economy is already at full capacity, monetarism predicts that inflation will rise by approximately 10 percent rather than real economic output increasing. For example, if your salary stays at 50000 dollars but inflation reaches 10 percent due to rapid money supply growth, your real purchasing power effectively drops to about 45000 dollars in actual buying power.
Etymology
MONETARY (relating to money) + -ISM (doctrine). The doctrine that MONEY SUPPLY drives economic outcomes.
Common Misspellings
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