Can overall prices grow with constant monetary base?

[abirkmanis]

Doesn’t every beginning text deal with this?

Every beginning text does not explain how actors come up with demand schedules nominated in money, when what they consume are goods and services.

[Smiling_Dave]

@Smiling Dave: “then after the frisbees are bought, there is 960 bucks left for 980 objects.” - I think there are still 1000 bucks in the economy, so the rest of the explanation does not work for me.

good point.

Taking it a step further, after the frisbees are bought, there is a thousand bucks chasing the 980 objects, so prices will go up. As more and more objects are bought, those same thousand dollars will keep chasing less and less objects, so that prices will keep going up and up. By the time there is only one thing left, it will cost a thousand dollars.

What’s wrong with this picture? The answer is that more things will be produced, right? So once we introduce that, after the frisbees are bought, 40 more dollar priced objects are produced, so it’s 1000 dollars chasing 1020 objects, so prices will have to fall.

[Esuric]

I think you identified what I missed: preferences to as opposed to spend (propensity to save? demand for money?). Even though actors in economy can spend the same dollar over and over, they may prefer to keep it instead (to later, or for a rainy day - none of which is technically possible in truly constant world, but I am willing to relax conditions that much ).

Well, you’re conflating the demand for cash holdings with the demand for future goods (saving). Saving does not lead to deflation because it increases the prices of future goods relative to consumer goods. Changes in the demand for money (cash balances) will alter prices, but this cannot happen in your world of stable preferences and total production (neither can an elevated savings rate, but I just wanted to make this clear).

[Smiling_Dave]

“Every beginning text does not explain how actors come up with demand schedules nominated in money, when what they consume are goods and services.”

I think that’s because they cannot read minds. It’s personal preferences [= feelings and emotions] that lead to those demand schedules.

[Azure]

Actually, a crop failure like that wouldn’t work, because the land itself would decrease in price.

…not if the supply of land itself decreases <.<

[abirkmanis]

after the frisbees are bought, 40 more dollar priced objects are produced, so it’s 1000 dollars chasing 1020 objects, so prices will have to fall

I think this argument applies no matter what was the price for the first 20 frisbees?

[hugolp]

A convincing demonstration should be enough. So far, all I’ve seen was along the lines: “there is only that much money chasing that much goods, so all the prices cannot rise”. Come on, money is not consumed during trade, the same dollar (or oz) can be used over and over, so even if entire amount of money in economy is spent to buy just half of the goods needed per period of time, it has not gone - it is still there (although distributed differently), and can be used to buy the remaining half of goods. Ah, I remembered, this is called velocity of money. What is the AE view of velocity of money?

Velocity of money does not affect prices (except with a few exceptions).

You correctly realize that the same note can be used to purchase several goods because money is not consumed as f.e. food is. Therefore you say that since money can be used several times the market “see” that money circulating as an increase in the money supply. What you are failing to see is that for any transaction there is money being exchange for some good/s. Therefore if the velocity of money rises the amount of money that the market “sees” rises, but also the amount of goods being exchanged rises in the same way. “More” money but also more goods, therefore prices are not affected.

This is both the austrian position and the reality.

[abirkmanis]

“More” money but also more goods, therefore prices are not affected.

I fail to see how transacting more money automatically means transacting more goods. Sure, if you assume constant prices, then I agree - but constant prices is exactly the point you claim to prove. Why cannot increase in transacted money lead to increase of prices (keeping transacted goods constant) instead of to increase of transacted goods (keeping prices constant)?

[hugolp]

I fail to see how transacting more money automatically means transacting more goods. Sure, if you assume constant prices, then I agree - but constant prices is exactly the point you claim to prove. Why cannot increase in transacted money lead to increase of prices (keeping transacted goods constant) instead of to increase of transacted goods (keeping prices constant)?

You can not “increase transactions” with “constant goods”. Transaction implies the exchange of money for goods. Therefore if there are more transactions there are more goods exchanged (donations, currency exchange and some other exceptions occur, but in general a transactions implies the exchange of a good).

[abirkmanis]

You can not “increase transactions” with “constant goods”. Transaction implies the exchange of money for goods. Therefore if there are more transactions there are more goods exchanged (donations, currency exchange and some other exceptions occur, but in general a transactions implies the exchange of a good).

I said “increase in transacted money”, not “increase transactions” (whatever the latter means). Keep the same flow of goods, increase the flow of money (by decreasing cash holdings, as Esuric pointed out). Presto, same goods exchanged for more money means higher prices.

[hugolp]

I said “increase in transacted money”, not “increase transactions” (whatever the latter means). Keep the same flow of goods, increase the flow of money (by decreasing cash holdings, as Esuric pointed out). Presto, same goods exchanged for more money means higher prices.

You mean a decrease in savings? Yes, in that case prices will rise. But its because the preference of the people have changed. I though we were assuming that the preference of the people was not changing.

And what does this have to do with the velocity of money?

[abirkmanis]

You mean a decrease in savings?

Now that you mention it, I think I agreed with Esuric too early. Money is always in cash holdings, so no matter how quickly it goes around, the cash holdings do not need to decrease… I am back to square one

And what does this have to do with the velocity of money?

I thought it’s obvious - the same flow of goods (and services, of course) is matched by a greater flow of money if velocity is higher - thus meaning higher prices. Now, the main question I still cannot wrap my head around is what determines prices (or velocity), as it looks like the same preferences (including demand for money) can lead to different prices/velocity…