Study Guide to Man, Economy, and State with Power and Market

136 Study Guide to Man, Economy, and State with Power and Market
consumer goods. In contrast, any stock of money can fully perform
the functions of a medium of exchange.
Money would fade out of use in the ERE. With perfect certainty,
people would loan out their cash balances and schedule
repayment just in time for their planned expenditures.
The PPM and the rate of interest are not inherently connected.
For example, the demand for money could increase
(raising the PPM), yet if time preferences remain the same, this
will not affect the (real) rate of interest.
New money always enters the economy at specific points;
contrary to typical thought experiments, it is never the case that
everyone’s cash balance suddenly increases by a certain percentage.
Even in such an unrealistic scenario, money would still be
“non-neutral”: Some people would spend their new money
more quickly than others, and thus would experience a relative
gain as the PPM adjusted to the new stock.
If there are two or more commonly accepted media of
exchange, their exchange ratio will be such that no arbitrage
opportunities are available in selling the moneys against other
goods. This is termed purchasing power parity. For example, if an
ounce of gold buys 1,000 DVDs while an ounce of platinum
buys 2,500, then the equilibrium exchange rate must be 2.5
ounces of gold for 1 ounce of platinum.
Money is not a measure of value. When someone buys a TV
for $50, we cannot conclude that he “values it” at $50; on the
contrary we know that he values the TV more than he valued the
$50. All price indices are arbitrary.
In reaction to the wild swings of the PPM (caused by government),
many economists propose various schemes to “stabilize”
the PPM. Yet such proposals are undesirable and unworkable.