Money and Overall Prices

The Supply and Demand for Money and Overall Prices

The terms "price" and "purchasing power" represent the same value - its' largely semantic at this point (if fifty cents is the price of an item, the item commands fifty cents in the market).

The demand for money is reflected in transactions - if prices are high, customers will not exchange money for goods, but will exercise the option of keeping their money in savings for future use, thus taking it off the market.

Some consumers will keep money for future use regardless of current prices. The amount of money that is kept in reserve by buyers is, itself, a demand for money.

Also, money isn't spent as soon as it is obtained, even for short-term necessary expenses: individuals receive a large sum and keep it stored for future use (even if "future" is next week), and carry on their person as much as is needed for near-term transactions (and emergencies).

There is also the influence of expectations: if prices are rising, individuals will spend money more quickly (buy things today because the price will be higher tomorrow), the converse of which is also true (conserve money to buy later if prices are falling).

Why Overall Prices Change

Governments mange the amount of currency in circulation. By putting more money in circulation, they decrease its unitary value, which effectively drives prices up (as each coin is worth less, suppliers demand more coin for their goods). This snowballs as individuals decrease their stores of cash in response to rising prices.

The converse is also true: when the supply of money is decreased, the unitary value of cash increases, prices fall, and consumers increase their stores of saved cash.

While other conditions may influence the price of a particular good, hence its price, the demand for money influences the price of all goods.