Chapter 4: Money’s Demand and Supply: Equilibrium and Disequilibrium (2)
EXCESS DEMAND FOR MONEY AND THE START OF DEPRESSION We are concerned with what must be in excess demand at the start of a depression resulting from a deficiency of spending. Chapter 3 deals specifically with what must be in excess demand in the depths of depression. By Walras’s Law any transactions-flow excess supply of commodities must be matched by a transactions-flow excess demand for all other things. The way the medium of exchange functions differently from even close nearmoneys justifies a more specific assertion. Demand for commodities in general cannot be deficient unless at the same time the opposite is true of the medium of exchange in particular. At levels of income and prices not yet changed from those at which the disequilibrium first appeared, people must be desiring to hold more money than exists. We are referring here to income not yet fallen to the quasi-equilibrium level that suppresses the actual or effective stock excess demand for money. Moreover, in the current context it is not necessary to dwell on the distinction between the stock and transactions-flow senses of disequilibrium. That distinction is crucial for understanding the depths of depression. In what follows we shall just refer to excess demands and supplies. Similarly, we are not overly concerned with the distinction between output and supply. That distinction is important in discussing the depths of depression in which actual output is kept down to equal demand, although an excess supply of commodities exists. Exceptions to the claim that money...
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