Monetarism is a theory that places money at the center of all economic activity. In this way, monetarism starts from money to explain the variables of the economy.
Monetary policy , according to this branch of thought, affects prices and production . That is why the money supply is key to the gross domestic product ( GDP ), also called gross domestic product ( GDP ).
For monetarism, prices depend on the amount of money in circulation . This means that a government, through its economic policy, has the possibility of increasing or decreasing the amount of money in circulation and, in this way, influencing either directly or indirectly costs, prices, production, employment, etc. .
When the supply of money is comparable to the demand for liquidity, according to classical monetarism, prices will remain stable. To guarantee the stability of the economy , therefore, the government must intercede in the market, although the ideal is that said intervention be as limited as possible to allow the free play of supply and demand.
Monetarism, in summary, is the doctrine that considers that the phenomena of money are determining factors in the fluctuations of the economy. From this premise it follows that monetary policy, carried out by the authorities that administer the State , can contribute to improving the economic situation.
Monetarist theory indicates that an increase in the money supply, which implies more checks and cash in circulation, increases production in the short term, although it causes inflation in the long term. That is why rulers must work to achieve balance and promote economic development.