According to monetarist theory, inflation is related to which of the following?

Monetarist theory, primarily associated with economist Milton Friedman, posits that inflation is fundamentally linked to the money supply. According to this theory, if the growth rate of the money supply exceeds the growth rate of real economic output, inflation will occur. This relationship emphasizes that managing the money supply is crucial for controlling inflation levels in an economy.

The underlying proposition is that an increase in the amount of money in circulation leads to a higher demand for goods and services, which, in turn, can push prices up if the supply does not keep pace. Thus, maintaining a stable growth rate of the money supply is key to achieving stable price levels and avoiding inflationary pressures.

Understanding this concept is critical for policymakers and central banks, as they often manipulate interest rates and conduct open market operations to influence money supply growth to maintain price stability. This foundational principle of monetarism highlights the importance of monetary policy in controlling inflation relative to other economic factors.