By Miles Fleming (auth.)
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Additional resources for Monetary Theory
This was in part the result of further analysis of the possible asymmetric effects on creditors and debtors of a change in the price level. The community, as holders of interest-bearing government debt, is better off when the price level falls; but the same community, in its role as taxpayers, is worse off because of the prospective increase in the real burden of servicing andjor repaying government debt. The latter consideration, if it is taken into account by individuals, 52 cancels out the former, thus leaving no net wealth effect when a fall in the price level increases the real value of interest-bearing government debt.
E. they may consume more (save less) as interest rates fall. This was the 'classical' explanation of the relation between saving and the interest rate. There is one more possible effect of an increase in the supply of money to take into account. Knowledge of this change in monetary policy may lead some firms and households to reason that the level of economic activity will therefore rise. The consequential improvement in profit and income expectations will increase expenditures on investment and consumption.
35 5 Monetary Dynamics If the quantity demanded of money is not equal to the quantity supplied, this means that the portfolios of some households and/ or firms (including financial ones) are not in equilibrium. Either the quantity of money in existence is not equal to the amount that the community wants to hold in the given circumstances, or the actual quantity is not equal to the amount that the banking system wants to supply, or both of these conditions. An enquiry into the consequences of this monetary disequilibrium is an exercise in dynamic analysis.