The Concept of Monetarism

Monetarism is an economic theory that focuses on the macroeconomic effects of the supply of money and central banking. Formulated by Milton Friedman, it argues that excessive expansion of the money supply is inherently inflationary, and that monetary authorities should focus solely on maintaining price stability.

Monetarism is a macroeconomic theory born out of criticism of Keynesian economics. It gets its name because of its focus on the role of money in an economy. This differs significantly from Keynesian economics which emphasizes the role that the government plays in an economy through expenditures, rather than on the role of monetary policy. To monetarists, the best thing for the economy is to keep an eye on the money supply and let the market take care of itself. In the end, the theory goes; markets are more efficient in dealing with inflation and unemployment.

Quantity Theory of Money:
The approach of classical economists toward money states that the amount of money available in the economy is determined by the equation of exchange:

MV=PY

M = the amount of money currently in circulation over a set time period V = the "velocity" of money (how often money is spent or turned over during the time period) P = the average price level Y = the value of expenditures or the number of transaction

Economists tested the formula and found that the velocity of money V increases, the whole of (PY) increases. As PY increases, transaction increases and transaction is a proxy for economic activity.  

The Vietnam War had several effects on the U.S. economy. The requirements of the war effort strained the nation's production capacities, leading to imbalances in the industrial sector. The funds were transferred overseas, which contributed to an imbalance in the payments and a weak dollar, since no corresponding funds were returning to the country. Despite the success of many, Kennedy and Johnson's economic policies, the Vietnam War was an important factor in bringing down the American economy from the growth and affluence of the early 1960s to the economic crises of the 1970s.

RISE OF R&D:

At that time US Economy was established to such an extent that they shifted their focus towards improving the standard of living and they recognized that standard of living comes with innovation which in turn is only through R&D. So at that point of time they started to invest more in R&D Department, such as the insulin strip.

CAUSES OF INFLATION:

Cost Push: A phenomenon in which the general price levels rise (inflation) due to increases in the cost of wages and raw materials. As the cost of input increases, the wage rate also increases and there is a wage push. Wage push inflation is an inflationary spiral that occurs when wages are increased and the business must, in order to pay the higher wages, charge more for their products and/or services

Demand Pull: This type of inflation is a result of strong consumer demand. When many individuals are trying to purchase the same good, the price will inevitably increase. When this happens across the entire economy for all goods, it is known as demand-pull inflation

Head line v/s Core: Headline inflation also called as WPI inflation, It is a measure of the total inflation within an economy and is affected by areas of the market which may experience sudden inflationary spikes such as food or energy (petrol) because of their high price volatility.

CPI: A consumer price index (CPI) measures changes in the price level of a market basket of consumer goods and services purchased by households. CPI is one of the most frequently used statistics for identifying periods of inflation or deflation. This is because huge rise in CPI during a short period of time typically denotes periods of inflation and huge drop in CPI during a short period of time usually marks periods of deflation.

WPI: An index that measures and tracks the changes in price of goods in the stages before the retail level. Wholesale price indexes (WPIs) report monthly to show the average price changes of goods sold in bulk, and they are a group of indicators that follow growth in the economy. It is mainly from the producer’s perspective.

Index of Industrial Production (IIP) in simplest terms is an index which details out the growth of various sectors in an economy. E.g. Indian IIP will focus on sectors like mining, electricity and manufacturing. Present IIP for 2013 comprises of 8 core industries.

 

Contributed by:

Venkata Rajeswari

Economics, Section A
Batch 2013-15