Авторы: 159 А Б В Г Д Е З И Й К Л М Н О П Р С Т У Ф Х Ц Ч Ш Щ Э Ю Я

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1. The Supply of Goods and Services

Before money can be held in one’s cash balance, it must be obtained in exchange. That is, we must

sell goods and services we produce in order to “buy” money. However, if the supply of goods and services

increases in the economy (i.e. supply curves shift to the right), the demand for money in exchange will also

increase. An increased supply of goods produced will raise the demand for money and also therefore lower

the overall level of prices. As we can see in Figure 3.6, as the demand for money rises, a shortage of cash

balances develops at the old equilibrium price level, and prices fall until a new equilibrium, PPM, is achieved.

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Historically, the supply of goods and services has usually increased every year. To the extent it does

so, this increase in the demand for money will tend to lower prices over a period of time. Indeed, so powerful

has this force been for lowering prices, that they fell from the mid-eighteenth century until 1940, with the only

exception during periods of major wars: the Napoleonic Wars/War of 1812, the Civil War, and World War I.

Paper money was increasing the money supply during this era, but increases in M were more than offset by the

enormous increases in the supply of goods produced during the Industrial Revolution in an unprecedented

period of economic growth. Only during wartime, when the governments ran the printing presses at full blast to

pay for the war effort, did the money supply overcome the effects of increasing production and cause price

levels to zoom upward.1