YouTube: https://youtu.be/qIOrw0jIsjQ
Monetarism is the belief that a country's ability to control its money supply is the most crucial factor in its economic health and stability.
During the 1970s, it became exceedingly popular.
According to monetary theory, a country's economic stability is determined by its monetary supply (the amount of money in circulation), as measured by statistics such as a nation's GDP, or overall level of output, and the inflation rate.
To put it another way, monetarism proposes that governments should promote economic stability by regulating the rate at which the money supply grows.
The quantity theory of money, which can be described by the equation of exchange, underpins monetary theory.
According to this theory, M*V = P*Q.
That is, the money supply ("M") multiplied by velocity of money ("V", the average rate at which money changes hands in an economy) equals the nation's price level ("P", the average price of all products and services) multiplied by total quantity of goods and services sold ("Q").
A most crucial point of monetary theory is that price levels will rise (that is, inflation) in tandem with increases in the money supply and vice versa.
The most well-known proponent of monetarism, Milton Friedman, even went as far as to say that governments should increase the money supply at a rate that corresponds to the growth of their economy's output.
Indeed, some economists today still argue that the US central bank, the Federal Reserve Bank, should adjust interest rates according to a set of rules.
Governments should, in other words, raise their money supply at a rate that corresponds to the increase in a country's GDP, or overall output.
This, according to monetarists, would help ensure the price level does not undesirably increase ("inflation").
Monetarist philosophy steadily went out of popularity after the late 1970s and early 1980s as more complicated and nuanced economic theories evolved to explain the modern economy.
Nonetheless, several aspects of monetarism, such as the necessity of regulating the money supply to control inflation, are still prominent in modern economics.
