Question

As a monetarist, Milton Freidman suggested that the government should only release the amount of money into the economy that matches the GDP production. Discuss how the entire demand curve for money will adjust to the equilibrium point. Would you agree with Milton Freidman’s opinion on the ability of monetary policy to address economic problems? Explain your rationale.

Answer 1

A monetarist is an economist who believes that money supply is the only enigma to economic growth. As a monetarist, Milton Freidman suggested that government should release certain amount of money supply that matches the output produced in an economy via encroaching aggregate demand to rise till it reaches potential output but it has a risk of creating inflation buddings in the economy which were otherwise not there.

As it is said that the grass is greener on the other side, increasing money supply in the economy seems a highly prosperous option that has the potential to reach its needful but at what cost is definately a concern for the economy.Also, it required government intervention in terms of moulding the rate of growth of money supply which is sufficient to affect output and price level and bring stability in economic growth.

Monetarists also believe that fiscal policy is ineffective and government spending and raising taxes cannot stimulate the economy as efficiently as monetary policy.

It works as follows, for example an expansionary monetary policy would imply lower interest rates as banks can lend more now which means consumers can afford more goods leading to hike in aggregate demand and vice versa in case of contraction in monetary policy.

Milton friedman, the father of monetarism had warned the US before the great depression that money supply should be raised gradually not at a faster rate which is more likely to cause inflation in the near future.

Hence, Milton was partially right in the importance of monetarism in the economy but it requires a lot of precision to not fall into inflationary expectations.