In macroeconomics, their are various schools of thought on how the economy works, and what policies the state should introduce in order to better the economy. .
Monetarism is a school of economic thought that holds that the money supply is the main component of economic activity. In other words, if the money supply grows, the economy will grow, and if money-supply growth accelerates, so will economic growth. Monetarism's leading advocate is Milton Friedman. Unlike Keynes, Friedman held that fiscal interference such as tax-policy changes or increased government spending has little effect on the fluctuations of the business cycle. They argued that government economic intervention should be kept to a minimum and believed that economic conditions would change before the policy measures could take effect. .
Fundamental to monetarism is the equation MV = PQ. M is the money supply; V is velocity or the number of times per year the average dollar is spent; P is price of various goods and services; and Q is quantity of goods and services. The equation suggests that if V is constant and M is increasing, there must be an increase in either Q or P. Monetary policymakers can then control inflation by allowing the money supply (M) to grow no faster than the desired rate of economic growth (Q). .
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Sometimes referred to as demand-side economics, Keynesian economics is based on the idea that tax-cuts for lower income workers helps the economy by giving consumers money to spend. According to the theory, this additional spending (which is thought to increase aggregate demand) will encourage businesses to hire more workers. These newly employed workers then will have money to spend, which will lead to more jobs being created, thus creating a cycle that will pull an economy out of recession. Keynesians also believe that inflation is a result of an over-activity in the economy, a problem that can be cured by raising taxes.