What is the Monetarist view of the Quantity Theory of Money?

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Monetarist argue that since money is a direct substitute for all other assets, an increase in money supply, given a fairly stable velocity of circulation, will have a direct effect on the demand for other assets since there will be more money to spend on those assets. If the total output of the economy is fixed then an increase in the money supply will lead directly to higher prices. Thus monetarists conclude that a rise in money supply will lead to a rise in prices and probably also a rise in money incomes.

In the short run, monetarists argue that an increase in money supply might cause some real increase in output and so an increase in employment. In the long run however, they argue that all increases in, money supply will be reflected in higher prices unless there is longer-term growth in the economy.

The monetary school of thought argues that the private sector is basically stable and therefore, the fundamental causes of economic fluctuations are the inappropriate government actions. It is therefore supposed to the existence of large public sector and also contends that money supply is the key determinant of the levels of production in the short run, and the rate of inflation in the long run.

Limitations of the monetarists? theory of money
(i) Monetarist theories assume that the velocity of circulation is relatively stable and on this basis, they establish a direct connection between money supply and inflation. In practice, however, the velocity of money circulation is known to
fluctuate up an down by small quantities
(ii) Price increases will not affect all goods equally. The prices of some goods will rise more than other and so the relative prices will change.
(iii) A relatively higher rate of inflation in one country may adversely affect that country?s balance of payments and exchange rate thereby introducing complications for the economy from external factors.
(iv) In practice, prices of the economy may take some time to adjust to an increase in money supply.
(v) Some Keynesians also argue that it is incorrect to assume that money supply is independent variable under the control of the government. In certain, situations, the money supply is completely demand determined which implies that any increase in PT can cause an increase in the demand for money which may automatically be matched by an increase in the money supply.

Wilfykil answered the question on March 8, 2019 at 11:27

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What is the Monetarist view of the Quantity Theory of Money?

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