3. Changes in the Money Relation
The purchasing power of money is determined by two factors, the total demand schedule for
money to hold and the stock of money in existence. If the stock of money is decreased, there
will be an excess of demand for money at the existing PPM and the PPM will rise until the
The New Equilibrium Point is reached.
The absurdity of classifying monetary theories into mutually exclusive divisions, such as
Supply and Demand Theory, Quantity Theory, Cash Balance Theory, Commodity Theory, Income
and Expenditure Theory, should now be evident.
For all these elements are found in this analysis.
Money is a commodity. Its supply or quantity is important in determining its exchange value.
Demand for money for the cash balance is also important for this purpose, and the analysis
This can be applied to income and expenditure situations.