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

138 Study Guide to Man, Economy, and State with Power and Market
by the intersection of the total demand curve with the given
total stock.
3. Changes in the Money Relation
If the demand for money increases, this means that people
wish to hold a stock of money balances higher than the actual
stock in existence. This “shortage” of money balances can be
eliminated through a rise in the PPM of money; that is, if people
want to hold higher money balances, they stop spending as
liberally and thus the nominal money prices of other goods and
services fall until equilibrium is reestablished. (Recall that people
ultimately care about their real cash balances; a given nominal
stock of money can represent any desired real cash balance
with the appropriate PPM.) A similar analysis holds for a drop
in the demand for money. If the total stock of money changes,
the PPM also adjusts until the quantity demanded of money
equals the size of the new stock.
4. Utility of the Stock of Money
In its capacity as a medium of exchange, money is useful only
insofar as it possesses purchasing power. If producer or consumer
goods were available for free, this would be a tremendous
boon to humanity. But if money has a zero price, it is useless.
Other things equal, it is always better to have more producer or
consumer goods. In contrast, any stock of money can fully perform
the functions of a medium of exchange. Increasing the
money stock (aside from its nonmonetary uses) can’t make the
community richer per capita; it can only redistribute wealth.