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Impact in economic history

Paul Volcker limited the money supply's growth (lowering the "M" in the equation of exchange)

after abandoning the previous policy of using interest rate targets.

While the change did help the inflation rate drop from double digits, it sent economy into a recession as interest rates increased.

In 1982 the Fed abandoned monetarism due to the recession and reverted to a Keynesian policy.

This increased money supply

- 7 year recovery

R U SRIUS

Friedman= POed

Political Impact

Other economists weren't sympathetic for they were watching a monetarist disaster happening in Great Britain

Works Cited

Copley, Britton, and Tim Duvall. "Stagflation." Your Daily Drink of Macroeconomics. Ed. Lucas Keegan. Web. 24 Mar. 2015. <https://oliveramesmacrog.wordpress.com/2013/04/page/2/>.

Friedman, Milton, and Anna Jacobson Schwartz. A Monetary History of the United States 1867-1960. Princeton: Princeton UP, 1963. Print.

McCallum, Bennett. "Monetarism." Library of Economics and Liberty. Web. 7 Mar. 2015. <http://www.econlib.org/library/Enc/Monetarism.html>.

"Milton Friedman." Library of Economics and Liberty. Web. 5 Mar. 2015. <http://www.econlib.org/library/Enc/bios/Friedman.html>.

In step with Great Britain, the U.S. Federal Reserve announced in 1979 that it, too, would follow a monetarist policy

"Milton Friedman.": The Concise Encyclopedia of Economics. N.p., n.d. Web. 10 Mar. 2015.

"Monetarism." Monetarism. N.p., n.d. Web. 24 Mar. 2015.

Equation of Exchange

"Pix For Phillips Curve Stagflation." Pixgood.com. Web. 24 Mar. 2015. <http://pixgood.com/phillips-curve-stagflation.html>.

Many people blamed the double-digit inflation

and high unemployment of the late 70s on

Keynesian theory, with too much expansion

of the money supply.

Critics thought that monetarism

would restore stability.

M= supply of money

V= Velocity of making money

P= Price Level

Friedman's work

Q= Quantity of goods/ services produced

In 1963, he and Anna Jacobson coauthored Monetary History of the United States, 1867–1960

Book stated that the great depression was

the result of the Federal Reserve’s

poor monetary policies

Federal Reserve Board responded with

a critical review and were so angry as to

discontinued their policy of releasing minutes from the board’s meetings to the public

Aspects of Monetarism

How theory is used today

The assumption that velocity is stable becomes a short fall of monetarism, because in reality, velocity is not always stable.

Monetarists believe that a slow steady increase in money supply will lead to a slow steady increase in GDP.

Graphs

"Money touches every phase of the economic life

of an economy and in consequence cannot fail to affect its politics as well,"- Monetary History

of the United States, 1867-1960

Limitations: Monetarism only works in good times, and some believe that actual central banks almost never conduct policy so as to involve exogenous changes in the money supply.

Friedman's monetary policy is currently out of favor

Debate linking monetarism and macroeconomics

The role of monetary policies in trade, international investment and central bank policy remain topics of argument.

Background

Born in 1912 to Jewish immigrants in NYC.

Earned his PhD from Columbia University.

1951-received the John Bates Clark Medal

1976-awarded the Nobel Prize in economics

Served as an adviser to President Richard Nixon 1967-president of the American Economic Association

1945-coauthored Income from Independent Professional Practice with Simon Kuznets

Monetarism

1957-He wrote A Theory of the Consumption Function, taking on the Keynesian view.

Friedman presented evidence to resurrect the quantity theory of money—the idea that the price level depends on the money supply.

In Studies in the Quantity Theory of Money, published in 1956:

Long run-increased monetary growth increases prices but has little or no effect on output.

Short run-increases in money supply growth cause employment and output to increase, and decreases in money supply growth have the opposite effect.

1960s-Friedman wrote Capitalism and Freedom, arguably the most important economics book of that time, making a case for relatively free markets.

Macroeconomic Impact

Inflation would disappear if the Federal Reserve Board increased the money supply at the same rate as real GDP increased.

Keeping low unemployment requires a permanently accelerating inflation rate (stagflation).

Monetarism emphasizes:

Long-run monetary neutrality

Short-run monetary non-neutrality

Distinction between real and nominal interest rates

Role of monetary aggregates in policy analysis

Milton Friedman: Monetarism

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