Monetarist Business Cycle Theory

Overview

Monetarism was a school of thought championed by Milton Friedman.

Aggregate Demand

Monetarists agreed with Keynes that fluctuations in aggregate demand were largely responsible for economic downturns, howver, where Keynes was neutral on the role of money in aggregate demand, monetarists focused their theories on it. Monetarists believed that changes in the money supply could drive changes in aggregate demand, in accordance with the Quantity Theory of Money

If one assumes that the money velocity (V) is relatively constant, then changes in money supply can drive changes in national production. This is thought to be particularly true in the short run.