How can the Automatic Monetary Policy of a fixed growth rate in the Money Supply as proposed by Milton Friedman, have a stabilizing effect on the economy?

Milton Friedman, an American economist, proposed the concept of Automatic Monetary Policy. According to this policy, the central bank should allow the money supply to grow at a fixed rate annually. This fixed growth rate should be determined based on factors like the target inflation rate, long-term growth rate of the economy, and the target level of employment. The goal behind this proposal is to provide stability and control fluctuations in the economy.

Money supply is an essential factor that affects the economy. An increase in the money supply can lead to increased economic activity, a higher rate of inflation, and a reduction in unemployment. On the other hand, a decrease in the money supply can slow down economic activities, lower inflation, and increase unemployment. Thus, managing the money supply is crucial in achieving economic stability.

By implementing a fixed growth rate in the money supply, the policy aims to maintain a balance between inflation and unemployment. The fixed growth rate should be set at a level that ensures a steady growth rate in the economy, without causing high levels of inflation. When the money supply grows at a fixed rate, it results in predictable and controlled changes in inflation and economic growth. These controlled changes, in turn, reduce fluctuations in economic activities, which leads to stability in the economy.

The stabilizing effect of the Automatic Monetary Policy comes from the fact that it removes the influence of discretionary monetary policy, which can be subject to human errors and political influences. By having a fixed growth rate in the money supply, the central bank's decision-making process is simplified, and the economy can operate in a more predictable and stable environment. Moreover, the automatic monetary policy reduces the likelihood of short-term economic fluctuations caused by changes in the money supply. This can help businesses and individuals make long-term plans and investments, which ultimately contributes to overall economic stability. In conclusion, the Automatic Monetary Policy's stabilizing effect on the economy comes from maintaining a fixed growth rate in the money supply, which ultimately reduces fluctuations in economic activity and provides a stable economic environment for businesses and individuals to thrive.