The Federal Reserve & Economic Theories
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Friedman was a monetarist of the Chicago school who went against the Keynesian idea that individuals and households adjust their expenditures on consumption to reflect their current income, and showed that instead, people's annual consumption is a function of their expected lifetime earnings (Milton; The Concise). He defied Keynes and most academics in presenting evidence to resurrect the quantity theory of money - the theory that price level is dependent on the money supply. Friedman's solution to the problems of inflation and short-run fluctuations in employment and real GNP was a so-called money supply rule. If the Federal reserve board was required to increase the money supply at the same rate as real GNP increased, he argued, inflation would disappear. Increasing government spending or increasing the money supply pushes the ISLM curve up and to the right. Friedman contended that the Great depression was the result of ill-conceived monetary policies by the Federal Reserve. Throughout the 1960s, Keynesians and mainstream economists shared the belief that the government faced a stable long-run trade-off between unemployment and inflation, known as the Phillips Curve (Milton; The Concise). In their view, by increasing the demand for goods and services, the government could permanently reduce unemployment by accepting a higher rate of inflation. Friedman challenged this view, arguing that once people got used to higher inflation rates, unemployment would creep back
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Approximate Word count = 851
Approximate Pages = 3 (250 words per page)
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