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The Relationship Between Microeconomics and Monetarism in Economics

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In economics, microeconomics is a term that defines how people live and how the choices they make affect the economy respectively. In other words, it is a study of households and how their choices affect the price of market goods and the overall economy. Money control or monetarism, on the other hand, is a theory asserted by Milton Friedman stating that the supply of money is the greatest driver towards economic growth. It is apparent that there is a very close relationship between microeconomics and monetarism as it will be observed in this context.

According to Milton Friedman, money control has a direct impact on microeconomics. He states that when a lot of money is released into the money chain, a demand for more money is created, and in the process, companies and other players in an economy produce more goods and services hence creating new jobs (Friedmanr & Friedman, 2012). However, He warns that monetarism may only offer a temporary lift to the economy which could be followed by recession and inflation in the long run. It is therefore important that the money supply becomes regulated to avoid a situation where demand may exceed the supply and affect the prices of commodities and jeopardize several jobs.

In the past, money was a valuable measure of liquidity, but things have changed in the contemporary world. Liquidity is considered as cash, market funds, and credits. On the other hand, bonds, loans, and mortgages are considered to be credits (Pindyck & Rubinfeld, 2018). Since money does not measure stocks, home equity and other assets, people are more willing to invest in stocks nowadays than in money markets. This is because when the stock markets Skyrocket, people get wealthier and have the purchasing power. For that reason, I disagree with Milton Friedman that monetarism determines microeconomics.

On the other hand, I agree with Milton Friedman when he says that microeconomics can be influenced greatly by money supply because when the amount of money in an economy is expanded, the rate of interests tend to go low in order to encourage people to apply for loans to improve their businesses (Pindyck & Rubinfeld, 2018). The interest rates lower because banks get more money at hand to loan to people. This gives people the ability to borrow money to expand their businesses or purchase big-ticket commodities to service their lifestyle. In this case, it is clear that money supply can significantly enhance microeconomics. Inversely, when money is decreased in an economy, the interest rates skyrocket, and things become more expensive hence directly affecting the population and their opportunity cost.

In a case where microeconomics dictates the money supply in the economy the chances of inflation are doubled. For that reason, consumer sovereignty should be regulated by money control instead of the opposite. This is in support of Milton Friedman when he stated that the cure for inflation is higher interest rates (Friedmanr & Friedman, 2012). While reducing the money supply may make life harder for the population through increased interest rates, it also introduces valuable principles such as cost-benefit comparisons where people calculate the cost of an item, evaluate their value and use the findings to determine their course of action. Other aspects such as incentives have a predictable effect on microeconomics.

When people receive incentives, they tend to be more committed to their work which may improve an organization’s income and overall economic power. Besides, the incentives are used by families to do other activities which may directly or indirectly contribute to economic growth. While there may be many factors affecting money supply, consumer sovereignty which is more related to the demands of people would only lead to inflation hence I agree with Milton Friedman that money supply should control microeconomics rather than microeconomics controlling the money supply.

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The Relationship Between Microeconomics and Monetarism in Economics. (2018, October 26). GradesFixer. Retrieved February 27, 2021, from https://gradesfixer.com/free-essay-examples/the-relationship-between-microeconomics-and-monetarism-in-economics/
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The Relationship Between Microeconomics and Monetarism in Economics. [online]. Available at: <https://gradesfixer.com/free-essay-examples/the-relationship-between-microeconomics-and-monetarism-in-economics/> [Accessed 27 Feb. 2021].
The Relationship Between Microeconomics and Monetarism in Economics [Internet]. GradesFixer. 2018 Oct 26 [cited 2021 Feb 27]. Available from: https://gradesfixer.com/free-essay-examples/the-relationship-between-microeconomics-and-monetarism-in-economics/
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