Monetarism Theory

Monetarism is a macroeconomic theory that promotes the idea that governments can achieve
economic stability by controlling monetary supply. A branch of Keynesian economics that emphasizes
the use of monetary policy over fiscal policy to manage aggregate demand, contrary to most
Keynesians.
According to Milton Friedman “the government should keep the money supply fairly steady, expanding
it slightly each year mainly to allow for the natural growth of the economy”.
In monetarism, we have the quantity theory of money in which the money supply is multiplied by the
rate at which money is spent per year equals the nominal expenditures in the economy.
MV = PQ
where:
M=money supply
V=velocity (rate at which money changes hands)
P=average price of a good or service
Q=quantity of goods and services sold