For most economists there is the need to keep the so-called economy along the path of a stable economic growth and a stable price inflation. One of the reasons for the possible deviation of the economy from the stable growth path is a change in the demand for money. If the authorities failing to make sure that an increase in the demand for money is accommodated by the corresponding increase in the supply of money this could result in the economy deviating from the path of stable economic growth and stable inflation. Hence, it is imperative for the central bank to make sure that the growth in the supply of money is in tandem with the growth rate of the demand for money in order to maintain economic stability.
Note that on this way of thinking, a growing economy requires a growing money stock, because economic growth gives rise to a greater demand for money. Failing to accommodate a strengthening in the demand for money could lead to a decline in the prices of goods and services, which in turn will destabilize the economy and lead to an economic recession.
Since growth in money supply is of such importance, it is not surprising that economists are continuously searching for the right, or the optimum, growth rate of the money supply.
Some economists who are the followers of Milton Friedman – also known as monetarists – want the central bank to target the money supply growth rate to a fixed percentage. They hold that if this percentage maintained over a prolonged period it will usher in an era of economic stability.
The idea that money must grow in order to sustain economic growth gives the impression that money somehow sustains economic activity.
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