CH. IO

THE FUNDAMENTAL EQUATIONS

149

reserve or withheld from the individual shareholderin one way or another—especially, for example, inthe United States . Meanwhile profits are more likely.to be used to pay off bank loans than to be held ascurrent cash, and the volume of business-deposits willbe primarily determined, as we began by assuming,by the business costs of production.

One other matter we may note in passing. Weshall see in later chapters that a change in the price-level, due to the second term of the FundamentalEquation, sets up tendencies towards a subsequentincrease in the first term. As these tendencies develop,a given rise in the price-level will require a largervolume of cash-balances to support it than when therise was wholly due to an increase in the second term.The fact that a change in the price-level, due to thefirst term of the Fundamental Equation, involves alarger change in monetary factors than an equalchange due to the second term, accompanied by thefact that change generally begins with the secondterm and then spreads to the first term, will befound to be a part of the explanation why certaintypes of price-changes tend to kill themselves asthey proceed and to set up a reaction in the oppositedirection.

In the case of equilibrium, where I = T = S, we canexpress our conclusions in terms of the usual monetaryfactors as follows.

If Mi- is the total of the Income-deposits andV x their velocity of circulation, we have E = M* V x ;for Vj is, by definition (see p. 44 above), the ratio ofthe money-income (E) of the community per unit oftime to M x , the amount of the income-deposits.

When I = I' = S, we can, therefore, re-write ourequations:

u-f- Q ■

If we wish to relate P to M, the total quantity of