ECN 101 Lecture Notes - Lecture 16: Monetarism, Money Supply, Phillips Curve
Document Summary
Monetarists believe the most significant factor influencing inflation or deflation is how fast the money supply grows or shrinks. They consider fiscal policy, or government spending and taxation, as ineffective in controlling inflation. Friedman, "inflation is always and everywhere a monetary phenomenon. " Some monetarists, however, will qualify this by making an exception for very short-term circumstances. Monetarists assert that the empirical study of monetary history shows that inflation has always been a monetary phenomenon. It simply stated, says that any change the amount of money in a system will change the price level. This theory begins with the equation of exchange: where: V is the velocity of money in final expenditures; Q is an index of the real value of final expenditures; In this formula, the general price level is related to the level of real economic activity (q), the quantity of money (m) and the velocity of money (v).
