Monetary theory

Monetary theory explores how money affects economies—its supply, demand, and impact on prices, output, and employment. Core ideas include:

• Quantity Theory of Money: Suggests money supply growth directly influences inflation if velocity and output are stable (MV = PY, where M is money supply, V is velocity, P is price level, Y is output).

• Keynesian View: Emphasizes money’s role in aggregate demand; liquidity preference and interest rates drive spending and investment.

• Monetarist Perspective: Milton Friedman argued that stable money growth prevents economic volatility, tying money supply to nominal GDP.

• Modern Monetary Theory (MMT): Argues governments issuing fiat currency can’t go bankrupt and can use money creation to fund spending, constrained by inflation.