I’ve watched your lecture on the Market for money twice but I do not understand the whole concept.
I understand the changes in PPM in the case of the boom and bust that are caused by a change in the money supply. In the case of hyperinflation, people think the purchasing power of their money will decrease in the future, thus their demand for money falls and they spend it all. I get that.
In the case of economic progress I can relate the increasing PPM to the fact that one monetary unit can buy more commodities (because economic progress makes more goods available). But why does the demand for money increase simultaneously?Couldn’t people just spend all their income on either investments or consumption and continue to enjoy a stable currency?
Don’t people express their demand for money when they lend money in order to have more money in the future?
I find this a little bit confusing…
The reason demand for money increases during economic progress is that as a person becomes wealthier he typically desires to hold a larger amount of assets, including money. Of course, people don’t have to do this, but it seems that during the economic progress of the latter part of the nineteenth century, they did hold more money and their standards of living rose. (The money supply was increasing at roughly the same rate as the rate of increase in real GDP.)
Saving and lending money earns the rate of return on investment. Holding money earns no rate of return since a person keeps the money in his possession instead of investing it. A person decides how to disburse his income between consumption and saving-investing by his time preference and into money holding by his preference to hold money as an asset. Of course, a person could have preferences such that he always holds a minimum amount of money and consumes and invests as much of his income as possible. But this is done to satisfy his preferences, not to produce a stable PPM. The PPM, like any price is a social phenomenon which no one person can control by his actions.