What are the policy implications of the quantity theory of money?

Expert Answers

An illustration of the letter 'A' in a speech bubbles

Economists who accept the quantity theory of money are usually called monetarists. Monetarists believe that there is a direct proportional relationship between prices and the amount of money in circulation, since the value of money is determined by this amount. The larger the money supply, the less money is worth, and the higher the prices of goods and services.

The implications for this theory on policy are clear: monetarists think that it is generally a bad idea to try to promote economic growth by increasing the money supply. Doing so, they argue, will only lead to inflation, since prices will rise proportional to the amount of money in circulation.

Most monetarists generally believe in maintaining a stable money supply, pursuing policies that do not...

(The entire section contains 2 answers and 379 words.)

Unlock This Answer Now

Start your 48-hour free trial to unlock this answer and thousands more. Enjoy eNotes ad-free and cancel anytime.

Start your 48-Hour Free Trial
Approved by eNotes Editorial Team