Title:Challenges Faced by Traditional Monetary Theory and China's Monetary Policy Choice

Traditional monetary theory believes that too much money will accelerate economic growth and lead to inflation. As the famous monetarist Milton Friedman said: Inflation is and only a monetary phenomenon. It is the inevitable result of the increase in the quantity of money faster than the increase in output. In this theory，the key determinant of the amount of money is the monetary base，the sum of currency in circulation and deposits held by banks and other depository institutions in their accounts at the central bank.

However，this theory is facing serious challenges: since the 2008 U.S. financial crisis and before the outbreak of COVID-19 pandemic in early 2020，the Federal Reserve(the Fed)，the U.S. central bank，has increased reserve deposits，the main part of the monetary base，dramatically，but broad money supply M1 and M2 have grown slowly. Not only has it failed to significantly increase consumption and inflation，it has also made people worry about the risk of falling into deflation.

But in China，the transmission of monetary base to the broad money supply is still smooth，and the connection between different measures of money supply and the real economy is still very strong. For this reason，so far，the required reserve ratio (RRR) policy is still one of the main tools of China's monetary policy.