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Equilibrium Supply And Demand Curve
Real Money Supply Equilibrium Equation
Supply And Demand Equilibrium Equation
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Real Money Supply Equilibrium Formula
Equilibrium Supply Demand

Aggregate Supply Curve Combinations of price level and income for which the labor market is in equilibrium. The short-run aggregate supply curve incorporates information and price/wage inflexibilities in the labor market, whereas the long-run aggregate supply curve does not. Approximated net realizable value at split-off allocation. The price level continues to rise with the increase in spending of the excess money balances and eventually reaches point B where the higher nominal supply of money is held at higher price (1/P', where P' P.). In the long run any supply of money is an equilibrium supply. The long-run movement from equilibrium O to B is shown in the figure.

Monetary disequilibrium theory is a product of the monetarist school and is mainly represented in the works of Leland Yeager and Austrian macroeconomics. The basic concepts of monetary equilibrium and disequilibrium were, however, defined in terms of an individual's demand for cash balance by Mises (1912) in his Theory of Money and Credit.^[1]

Equilibrium Supply And Demand Curve

Monetary disequilibrium is one of three theories of macroeconomic fluctuations which accord an important role to money, the others being the Austrian theory of the business cycle and one based on rational expectations.^[2]

History of the concept[edit]

If the real money demand is greater than the real money supply, interest rates must rise to reach equilibrium in the money market as institutions sell bonds to obtain more money. Real Money Supply = Real Money Demand where MS is the amount of money/currency supplied by the Central Bank (through open market operations). This equilibrium in the money market is represented in Figure 2. Given the supply of money MS (and a given price level P), the real money supply (MS/P) is exogenously given. The real money supply does not respond to R. Money Demand = Money Supply in Equilibrium L(R;Y1) Q Q 1 R R1 M/P = L in equilibrium Note: compare KOMIF Fig 4-3 (KOM 15-3).

Leland Yeager's (1968) understanding of the monetary disequilibrium theory begins with fundamental properties of money.^[3]^:156–61

Inflationary monetary-disequilibrium.

The role of money as the generally accepted medium of exchange is one of the most important properties. The other two properties that Yeager emphasized are that the demand for money is a demand to hold real money balances and that the acquisition of money has a 'routinenss' to it that distinguishes it from other goods. He actually made effective use of the cash balance approach to the demand for money.^[3] When we combine these two properties we get a distinction between actual and desired money balances. The differences between individuals' actual and desired holdings of money are the proximal causes of them affecting the level of spending in the macroeconomy. These differences between actual and desired money balances appear economy-wide when we have inflation or deflation.

It presents an alternative to the real business cycle model and the quantity theory of money considered only a long-run theory of the price level. While it is widely agreed in economics that monetary policy can influence real activity in the economy, real business cycle theory ignores these effects. The theory also addresses the effects of monetary policy on real sectors of the economy, that is, on the quantity and composition of output.

Monetary-disequilibrium theory states that output, not (or not only) prices and wages, fluctuate with a change in the money supply. To that degree, prices are represented as sticky. It is this “monetary disequilibrium,” that, the theory contends, affects the economy in real terms. Thus, changes in the money supply will result first in a change of output in the same direction, as distinct from merely a change in prices. Consequently, an increase in the money supply will induce workers and businesses to supply more, without being fooled into doing so. In a situation where the money supply contracts, businesses will respond by laying off workers. In this way, the theory accounts for involuntary unemployment. The disequilibrium between the supply and demand for money exists as long as nominal supply does not automatically adjust to meet the nominal demand.^[4]Monetary-disequilibrium is a short-run phenomenon as it contains within itself the process by which a new equilibrium is established i.e. through changes in the price level. If the demand for real balances changes, either the nominal money supply or price level can adjust to monetary equilibrium in the long run as seen from the figure.^[3]From the definition of monetary-disequilibrium movements in the demand for money are responded to the changes in the real money supply through adjustments in the nominal money supply as seen from the movement from point O to A in the figure and not the price level (movement from O to A' in the figure).

The demand for money means demand to hold real cash balances. If the money supply is increased to an amount beyond which the public desires to hold (from MS to MS'), this is interpreted as a movement from O to A, as illustrated in our figure. With the increase in supply of money, people find themselves with larger money balances than they wish to hold and thus reside temporarily at point A. If we assume that there has been no change in the demand for money, these excesses will be spent on goods, services or financial assets thereby increasing their prices, leading to a movement from point A to new equilibrium point B. The increase in the aggregate price level (P* < P') is associated with excess supplies of money which reflects these individual increases. The price level continues to rise with the increase in spending of the excess money balances and eventually reaches point B where the higher nominal supply of money is held at higher price (1/P', where P' > P*).In the long run any supply of money is an equilibrium supply. The long-run movement from equilibrium O to B is shown in the figure.^[5]

Early monetary-equilibrium theory[edit]

Swedish economist Knut Wicksell (1898) was one of the main propagators of the theory. He was primarily concerned with the behavior of the general price level, as influenced by interest rates. As described by Gunnar Myrdal in 1939, the definition given by Wicksell was based on the existence of three conditions.^[1]

First, among them is the equivalence of the 'natural' rate of interest and the money rate of interest. The second condition of monetary equilibrium is equilibrium in the capital market. That is the equivalence between the supply of and demand for savings. Finally, the third condition of monetary-equilibrium concerns equilibrium in the commodity market defined as stable price level.

Myrdal however has a different stand all together on this. He does admit the possibility that an increase in savings might decrease the money interest rate thereby increasing the investment but does think this to be a very strong factor and therefore misses the equilibrating function of the interest rates in the capital market.^[1]

Two important points regarding monetary-equilibrium needs to be stated.Firstly, there is no necessary relationship between monetary and general equilibrium. It is totally compatible with disequilibria in various markets for goods and services.Secondly, monetary- equilibrium can be seen as a desirable policy goal by monetary regimes.

Monetary-equilibrium in the Austrian School[edit]

The concept of monetary-equilibrium is basically a European one. Much of the work on this doctrine has been done by Swedish, British and Austrian economists. The whole approach begins with the work of Knut Wicksell in the development of the concepts of natural and market rates of interest. Wicksell believed that if the two rates are equal then the price level will be constant and any difference in the two rates will manifest themselves as changes in the value of money. Wicksell's work had