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Macroeconomic Schools of Thought

Monetarist Model


Monetarist Model

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throughout this course, we're focused mainly on Keynesian economics. Let's quickly discuss another model called the Monetarist model. So the monitoring model, It argues that Keynesian economics overstated the instability in the economy. Remember that the Keynesian economics focused on government intervention, government intervention um to fix inflation and to to fix to fight inflation and to fight recessions as well. Right? Uh government intervention was always necessary. And they thought uh they also thought that there was sticky wages as well, right? There were sticky wages and prices. However, Um the monitor's models had a few different opinions. So it was developed by Milton Friedman, who was a Nobel prize winning uh economists who want a Nobel prize in around the 1970s. But he developed this theory in the 1940s. So the basis of monitoring is um is the primary focus on the money supply. Okay. They spent a lot of time thinking about the money supply. And remember when we studied the money supply, this is controlled by the Fed right? The Federal Reserve is the Central bank in the United States and they control the money supply in the United States. Okay, so, uh they didn't believe this instability in the economy. They did believe that competitive markets led to a high degree of stability. So we didn't need so much intervention um to to keep the economy in in check. So the main thing with the Monetarist model is the quantity theory of money. Okay, and we have a whole other video where we go a lot deeper into the quantity theory of money. Um And we'll we'll talk about this in a lot more detail. So the quantity theory of money, it's a theory that connects the money supply with the level of prices. And it's basically the whole quantity theory of money is based on this formula right here, where the money supply times the velocity of money is equal to the price level times Real GDP. So this velocity of money, think about when you have a dollar and you spend that dollar, right? That same dollar gets spent again, you go to the store and you buy a soda with that dollar, the store takes it and puts it in the bank, the bank loans it to someone else, That same dollar goes through the money through the system several times in a year. Right? So that's the velocity of money is how often $1 gets spent, right? It changes hands over and over throughout the course of the year. Whereas the money supply, Well, that's the number of dollars there are. So the number of dollars times how many times those dollars are spent. Well, that's going to equal the price level, how much things cost times Real GDP, what's being produced. Okay, so that's the whole theory, the quantity theory of money that the Monetarist model follows. So the Monetarist model believes that the velocity of money is stable, so the velocity of money is stable. So we think this is pretty much always the same every year. Okay, they thought that the velocity of money was stable, Each dollar gets spent the same amount of times year over year. Okay, So what they thought is by steadily increasing the money supply by increasing the money supply, they'll be able to increase real GDP. Okay, so Real GDP will consistently grow um Uh with the increases in the money supply, it will increase growth in spending and GDP. Okay. However, the monetarist model got a lot of hype and got used in in the 1970s and early 1980s and it influenced monetary policy quite a lot in the in that era, but during this era inflation soared and it led people to think that monitoring um was flawed. Okay, so that's the main thing about the Monetarist model, is this quantity quantity theory of money. Okay, so, we'll have another video where we discuss that, but for now, that's that's basically all we need to know about monitoring is um in this class. All right, let's go ahead and pause and we'll move on to the next video