Money Growth Rule :: essays research papers

silver Growth RuleThe Money Growth Rule is based upon a theory originally set forth by Milton Friedman as a solution to keep the United States economy on a controlled physical body of return. The thoery revolves around the premise that the best monetary policy that the Federal guard can follow is to establish a constant offshoot appreciate of the gold tag on independent of current stinting fluctuations. The reasoning is that as the economy experiences changes in relative output, the bills emerge can assume dramatic effects upon the economy. Additionally, by establishing a money growth rule, Friedman believed that this would abolish the possibility of short-run mismanagement and, in the end, be more well(p) for the economy.The line with balancing an economy is that human judgment and evaluation of economic situations enter into the equation. Establishing a constant growth level in the money supply would eliminate the decision making process of the central banker. The pr oblem with human intervention is the short-sided nature of many of the policies designed to aid the economy. such(prenominal) interventions, which yields unintended negative consequences, is the result of the time inconsistency problem. This problem is understand through situations during which central bankers conduct monetary policy in a discretionary way and pursue expansionary policies that ar attractive in the short-run, plainly lead to detrimental long-run outcomes. Friedman believes that by leaving money growth decisions to an individual, the results are poor long-run management and stock-stilltually high lump rates, an obvious detriment to the economy.The idea of the money growth rule is dependent upon(p) upon the relationship between the money supply and inflation. Therefore, the question arises whether there even is a relationship between money supply and inflation. As utter earlier, one can see a relation between money and inflation. Presented above is series data t hat displays this relationship between money supply and the inflation rate over the previous decades. The problem is that there are fluctuations within the data and therefore a broader definition of the money supply must be utilized. Based on the research of Dr. Terry J. Fitzgerald, an economist at the Cleveland Federal Reserve Bank, if one defines money supply as M2, when examining the data over a multiple year progression, a mold begins to present itself. Further, by graphing the difference between adjusted money growth and inflation, the link becomes evident. These graphs show the weight that changes to the money supply can possess upon an economys inflation rate.