CHAPTER 16

A CLASSIFICATION OF THE CAUSES OF ADISEQUILIBRIUM OF PURCHASING POWER

Assume a state of equilibrium in which the price-levelcorresponds to the cost of production, profits are zero,the cost of investment is equal to that of saving, and(if we are dealing with a member of an internationalsystem) the rate of foreign lending is equal to theforeign balance. Assume also—if our community isa progressive one—that the supply of money is beingincreased at the same steady rate as that of generaloutput, e.g. (say) 3 per cent per annum. In whatway can this state of equilibrium be upset ?

It follows from the Fundamental Equation ofChapter 10,

E I-S

n

: o + ‘

0

that the Price-level of Output is wholly governedby the three factors : (i.) E, the volume of money-earnings of the factors of production, (ii.) 0, the volumeof current output, and (iii.) I-S, the relation betweenthe volume of saving and the value of investment.Changes can only be effected, therefore, through oneor other or all of these fundamental factors.

Bearing this in mind, we can best classify thepossible initiating causes of disturbance under threeheads, which we may call respectively changes due toMonetary Factors influencing the effective supply of

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