Profit and inflation question

[Telemachus]

Yeah, my thinking was too simplistic about all this, but I didn’t know where to start in thinking about this simple scenario.

@Joel

Suppose that, as the economy progresses, people desire to hold an increased amount of money, but the supply of money is fixed. What they really desire is to hold an increased amount of purchasing power, not an increased number of units of money per se. In general, they will attempt to increase sales and decrease purchases, in an attempt to increase their money holdings. Obviously, because the money supply is fixed, they will not succeed in holding a larger total number of units of money. But their attempts will cause prices in general to fall. This makes one unit of the money go further–that is, it has greater purchasing power. Although the total number of units of money remains constant, the total amount of purchasing power of money increases. This will satisfy the increased demand for money.

This is what I was looking for. I couldn’t understand what sort of feedback mechanism would allow currency to re-flow under a fixed-currency regime, but this makes sense.