What is the main idea of monetarism?
Monetarism is a macroeconomic theory which states that governments can foster economic stability by targeting the growth rate of the money supply. Essentially, it is a set of views based on the belief that the total amount of money in an economy is the primary determinant of economic growth.
What is the rate of money growth?
Now money demand grows over time primarily because the real economy grows over time (average real growth is about 2.5% per year on average). As Y grows individuals consume more and thus need more money to conduct transactions.
Is the velocity of money constant?
According to the quantity theory of money, the general price level of goods and services is proportional to the money supply in an economy—assuming the level of real output is constant and the velocity of money is constant.
What is the money-growth rule?
In the other policy regime (we call it the money-growth rule) the government fixes the rate of growth of the money supply and adjusts the level of seigniorage as to satisfy its money growth rule. This model is a version of Friedman’s rule of a “constant growth of the money supply.”
What is the k-percent rule in economics?
Gross domestic product (GDP) is a metric that shows the percentage growth of all goods and services produced in an economy. In the United States, the typical GDP growth rate is 2-4%, based on historical averages. The K-Percent Rule would allow the level of money supply in the economy to grow with the GDP growth rate.
What is Friedman’s k percent rule in economics?
Friedman’s k-percent rule. Friedman’s k-percent rule is a monetary policy rule that the money supply should be increased by the central bank by a constant percentage rate every year, irrespective of business cycles.
Why should the Central Bank follow an acyclical monetary policy?
He believed giving governments any flexibility in setting money growth would lead to inflation and therefore, the central bank should follow an acyclical monetary policy and expand the money supply at a constant rate, equivalent to the rate of growth of real GDP .