Question

• Review and compare the trends in money supplies/ aggregates to the trend in the CPI over several decades.
• State your opinion about the validity of Monetarism (Friedman's famous quote that inflation is everywhere and always a monetary phenomenon).
• Has Monetarism been an effective tool for conducting monetary policy?
• What role does monetarism have in current monetary policy?

Answer 1

Consumer' s price index for urban consumers over many decades is what I chose.CPI is the monthly change in prices of products as well as services in different time periods.There was a large increase in CPI from 1950 to 2017.In Jan 1950 CPI was 23.51 and in 1975 it increased to 52.30.This trend continued for decades and in Jan 2017 it increased to 244.16.

Again M2 which is financial assets of households consists of M1 plus saving deposit.In January1975 M2 was 906.3. In ten years it increased to 2,333.4. In July 2017,M2 was 13,525. 3.Increase in M2 coincides with increase in CPI.

The monetarism view of fiscal policy is that velocity of money changes do not affect aggregate demand as monetarist consider velocity of money to remain stable.My view holds that velocity of money is not stable and need to change.The monetarist view is limited as with Keynesian view aggregate demand , prices , output, interest rates will be affected or will not be affected .when money supply changes.

The monetarist view appears to be inaccurate as the chart in Schiller regarding the velocity of M2 is not stable .

Monetarist believe that velocity of money change is not predictable in the short run.But it is stable in the long run.According to them Fed should concentrate on money supply and increase it by the amount that is fixed so as to get the target of money growth.