The Fed should simply increase the money supply at the same rate that the full employment economy grows, and the government should desist from any stabilizing urges." What school of thought would make this suggestion, and how do economists of that school justify that prescription?
Do a little research, then take a shot. what do you think.
Hint. Be sure to read up on Monetarists, and the quantity theory of money.
"The Fed should simply increase the money supply at the same rate that the full employment economy grows, and the government should desist from any stabilizing urges." What school of thought would make this suggestion, and how do economists of that school justify that prescription?
The suggestion that the Federal Reserve should increase the money supply at the same rate as the growth of a full employment economy, while the government should avoid intervening to stabilize the economy, aligns with the school of thought known as "Monetarism." Monetarism is an economic theory associated with the teachings of American economist Milton Friedman.
Monetarists emphasize the role of money supply in determining the overall level of economic activity and believe that changes in money supply have a direct impact on inflation and economic growth. According to monetarists, the primary responsibility of the central bank, such as the Federal Reserve, is to control the money supply to ensure stable and predictable economic growth.
The justification for this prescription is based on several key arguments put forth by monetarist economists:
1. The Quantity Theory of Money: Monetarists believe in the Quantity Theory of Money, which posits that changes in the money supply result in direct proportional changes in the overall price level in an economy. By increasing the money supply at the same rate as the growth of a full employment economy, monetarists aim to maintain a stable price level and keep inflation under control.
2. Predictability and Stability: Monetarists argue that a predictable and stable monetary policy promotes long-term economic stability. By adhering to a rule-based approach of increasing the money supply in line with economic growth, individuals and businesses can make more informed decisions, leading to less uncertainty and greater economic stability.
3. Market Efficiency: Monetarists believe that markets are generally efficient and self-adjusting. They argue that government intervention to stabilize the economy, such as through fiscal policy measures like taxation or government spending, can have unintended consequences and disrupt the market's natural mechanisms of adjustment. By avoiding such stabilizing urges, monetarists advocate for allowing market forces to determine resource allocation and economic outcomes.
It is important to note that while monetarism has had a significant influence on economic policy and central banking, it is not the only school of thought. Other schools, such as Keynesian economics, may offer different perspectives on how monetary and fiscal policies should be conducted to achieve economic stability and growth.