The monetarist school believes that interest rates are time-delayed and cannot reflect the economic situation in time, and the reflection of interest rates on money supply is not negatively correlated as Keynes thought. In the short term, the increase of money supply will reduce interest rates, but in the long term, with the increase of investment and demand, the demand for money will increase, and the interest rate of money will rise again.

Brief introduction of monetary school

Monetarism is a school of economics, also known as monetarism, which appeared in the United States in the 1950s and 1960s. Its founder is Friedman, a professor at the University of Chicago. In theory and policy proposition, the monetary school emphasizes that the change of money supply is the fundamental and dominant reason that causes the change of economic activities and price level.

The main (though not the only) reason for the change of nominal national income lies in the change of money supply determined by the monetary authorities. If the change of money supply will cause the change of money circulation speed in the opposite direction, then the influence of the change of money supply on prices and output will be uncertain and unpredictable. Friedman emphasized that the money demand function is a stable function, and he tried to minimize the possibility of the change of money circulation speed and its possible impact on output and price, thus establishing a definite causal relationship between money supply and theoretically predictable nominal national income.

In the short term, the change of money supply mainly affects output and partly affects price, but in the long term, output is completely determined by non-monetary factors (such as the quantity of labor and capital, resources and technical conditions, etc.). ), and the money supply only determines the price level.

The capitalist economic system is essentially stable. As long as the market mechanism is brought into full play to regulate the economy, capitalism will develop steadily at an acceptable level of unemployment. Keynesian fiscal and monetary policies that regulate the economy have not reduced economic instability, but strengthened it. Therefore, Friedman strongly opposed state intervention in the economy and advocated a "single rule" monetary policy. This is to take the money stock as the only policy tool, and the government will publicly announce a long-term fixed money growth rate. This growth rate (such as 3-5% per year) should be consistent with the expected long-term average growth rate of real national income under the condition of ensuring the stability of price level.