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  Monetarism, in economics, is the belief that control of the supply of money is sufficient for the attainment of full employment and general economic stability, at least in the longer run. Specifically, monetarists believe in the quantity theory of money and see monetary expansion or contraction as only having a transitory effect on ‘real’ variables like output and employment.

Monetarists applauded when, in 1979, the US Federal Reserve shifted from interest rate targets to money supply targets to try to control inflation and the level of economic activity. Keynesians (see Keynesian Theory), on the other hand, emphasize fiscal policy for control of the economy, while acknowledging in recent years that money matters, somewhat.

Monetarists differ in their policy recommendations for control of the money supply. Some support the Federal Reserve Board policy of setting money stock targets, which increase or decrease the rate of growth in the money supply to combat inflation and the business cycle. Many, including Milton Friedman (probably the most famous late-20th-century monetarist), hold that the Federal Reserve should follow a rule of increasing total bank reserves by a constant percentage per year, an increase just sufficient to accommodate the long-run average rate of economic growth. This, in turn, would control the other money supply aggregates which would benefit price stability. TF

Further reading Milton Friedman, Studies in the Quantity Theory of Money; Essays in Positive Economics.



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