Portfolio Management - Monetarist Theory




  • Monetarist theory, developed in the 1950s by Milton Friedman, was the driving force of Ronald Reagan's "supply-side" economics of the 1980s. It places less emphasis on expenditure and more on money supply.

We all know what "supply" is, but "money" is harder to define. First and foremost, money is a medium of exchange - an asset used to buy and sell goods and services. Currency in circulation is money by anyone's definition, but what about funds invested in CDs? Are they money or are they long-term assets? What about the trillion dollars or so that flows through banks every night on its way to making substantive purchases? Is it part of the nation's cash on hand, or does it represent investment? The further the dollar-denominated asset veers from being a simple medium of exchange, the harder it is to categorize. That is why economists identify three separate money supplies:

  • M1: Notes and coins in circulation, money in checking accounts, and travelers' checks.

  • M2: M1 plus savings accounts, small- and medium-sized CDs and small- and medium-sized money market mutual fund shares.

  • M3: M2 plus CDs over $100,000, money market mutual fund shares over $100,000, overnight loans from customers and U.S. residents' dollar-denominated deposits at financial institutions outside the U.S.
Economic Indicators (Part 1 of 2)


Related Articles
  1. Economics

    What Part of the Money Supply is M2?

    M2 is the part of the money supply economists use to analyze and predict inflation.
  2. Economics

    Understanding Money Supply

    Money supply – also called money stock -- refers to the total amount of currency and other liquid financial products in an economy at a particular time.
  3. Economics

    What is M1?

    M1 is a measurement of money supply that includes all hard currency, plus demand deposits such as checking accounts.
  4. Fundamental Analysis

    What Is the Quantity Theory of Money?

    Take a look at the tenets, assumptions and challenges of monetarism's principal theory.
  5. Economics

    Macroeconomics: Money And Banking

    By Stephen Simpson TMoney can be thought of as any good that is widely used or accepted in the transfer of goods and services. Today, there are three common forms of money in use. Commodity ...
  6. Economics

    What Is Money?

    It's a part of everyone's life, and we all want it, but do you know how it gains value and how it is created?
  7. Economics

    Monetarism: Printing Money To Curb Inflation

    Learn how Milton Friedman's monetarist views shaped economic policy after World War II.
  8. Mutual Funds & ETFs

    Introduction To Money Market Mutual Funds

    Learn about the easiest way to benefit from money market securities.
  9. Savings

    Certificate of Deposit (CD)

    A certificate of deposit, or CD, is a common financial product sold by banks, thrift organizations and credit unions. This type of product is often called a time deposit. CDs are insured up to ...
  10. Savings

    Inflation for Dummies

    Inflation may seem like a straightforward concept, but it is more complex than it appears. We examine its varieties and causes.
RELATED TERMS
  1. M1

    A measure of the money supply that includes all physical money, ...
  2. M2

    A measure of money supply that includes cash and checking deposits ...
  3. Money Supply

    The entire stock of currency and other liquid instruments in ...
  4. Monetarist Theory

    An economic concept which contends that changes in the money ...
  5. M3

    A measure of money supply that includes M2 as well as large time ...
  6. Monetarist

    An economist who holds the strong belief that the economy's performance ...
RELATED FAQS
  1. What types of money are included in money supply?

    Read about several different monetary aggregates used to define the money supply, both at the Federal Reserve and by outside ... Read Answer >>
  2. Does M1 include foreign currency?

    Learn the definition of M1, as well as other categories of money supply in the United States. Learn how it may differ in ... Read Answer >>
  3. Will M1 ever become obsolete?

    Learn why the M1 money supply may evolve and transform into different mediums but will continue to remain in existence for ... Read Answer >>
  4. How much of the United States' money supply is M1?

    Learn how much money is in the M1 category of the United States money supply. Learn how M1 has averaged and changed over ... Read Answer >>
  5. What happens when M2 money supply grows faster than the overall economy?

    Find out what happens if the total supply of money and money substitutes expands at a faster rate than the productive output ... Read Answer >>
  6. How do changes in interest rates affect M2?

    Learn about the effects of changes in interest rates on M2. M2 includes M1 and other less-liquid short-term investments that ... Read Answer >>
Hot Definitions
  1. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  2. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  3. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  4. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  5. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  6. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
Trading Center