Abstract: This chapter discusses the way in which the level and movements of the supply of and demand for money affect the level and movements of money income. The quantity theory of money was originally an explanation of the average price level of nonmonetary goods and services. The fundamental proposition of monetary theory is that nominal income must adjust until it reaches a value at which the demand for nominal cash balances equals the stock of money made available by the authorities and banks. If the real demand for money is fixed and real output is given, then the adjustment of money income to an equilibrium level is brought about by changes in prices, the equilibrium level of which must equal the ratio of the nominal money supply to the demand for real cash balances. Under these conditions, changes in the money supply cause proportional changes in the equilibrium price level and in nominal income. Comparison of the monetary theory of income with the income−expenditure model shows that equilibrium in the latter is based upon equilibrium in the former. In both theories, equilibrium requires a stable money demand function and a given stock of money.
Publication Year: 1982
Publication Date: 1982-01-01
Language: en
Type: book-chapter
Indexed In: ['crossref']
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