Monetary theory
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Monetary theory explores how money affects economies—its supply, demand, and impact on prices, output, and employment. Core ideas include:
- Quantity Theory of Money: Suggests money supply growth directly influences inflation if velocity and output are stable (MV = PY, where M is money supply, V is velocity, P is price level, Y is output).
- Keynesian View: Emphasizes money’s role in aggregate demand; liquidity preference and interest rates drive spending and investment.
- Monetarist Perspective: Milton Friedman argued that stable money growth prevents economic volatility, tying money supply to nominal GDP.
- Modern Monetary Theory (MMT): Argues governments issuing fiat currency can’t go bankrupt and can use money creation to fund spending, constrained by inflation.