Reply To: Some questions


The key point, as you note, is that an increase demand for money raises the PPM, that is prices fall from the concomitant decrease in demand for goods, both consumer and producer goods. If time preferences stay the same, then the price spreads between consumer and producer goods must stay the same, i.e., the rate of return in production must stay the same. The extent to which the PPM rises, then, will depend upon maintaining the same price spread between the now lower prices of both consumer goods and producer goods. To put the point more generally, prices are flexible enough to adjust throughout the economy to maintain both a unchanging interest rate of return on production and a lower overall price structure in the face of an increase in money demand.