Friedman 's The Economic Framework Of Monetary Policy Essay

1845 WordsNov 28, 20168 Pages
Friedman first starts his book with a chapter that deals with the question “what is money.” Money is any item that has a store of value that can be used to trade. The example of the island of Yap, and how the islanders had money that had come from stones. The islanders of Yap had money that was backed up by an entity that was precious (Friedman 1994). Friedman then relates the example of Yap to the United States and how individuals in the United States trust Federal Reserve Notes mainly because they trust the system which allows the currency not to be pegged to a commodity or specie (Friedman 1994). After showing what money can do for a society and the wealth of that society, Friedman moves into laying the economic framework of monetary policy and how those policies affect the economy overall. The first observation that Friedman makes in his work is that there is a relationship between the nominal growth rate of the money supply and the rate that the nominal income increase for an individual (Friedman 1994). That observation can be noted in the Quantity Theory of money equation, MV=PY, where M is the rate of growth in the money supply and Y is the rate of growth in income (Friedman 1994). In the equation, V is velocity, which is held constant, and P is the price level. In the framework of the model, velocity is assumed to be held constant, which means that if the money supply increases and income increases, then the price level has to increase as well. However,
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