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September 17, 2016 at 1:23 am
#18763
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After a little bit of thinking of the example above, it finally clicked. When people demand to hold more money, the PPM goes up, therefore people can buy more consumer/producer goods. Since consumption went down (90-81) more than investment (10-9), prices of consumption goods fall relative to the rise of value of money, therefore the price spreads between present and future goods would be the interest rate.