<p>To me the key words are "at current prices" and this looks like a quantity theory of money, especially as described by Milton Friedman.</p>

<p>In this theory, if there is too much money then prices will rise, while if there is too little money then prices will fall.  </p>

<p>So only if there is enough money (and no more) can we buy <em>at current prices</em> all of the goods and services the economy is producing.  Without enough money, we cannot buy everything, and with too much there would be excess demand at current prices.  This makes various assumptions, for example about stability of the velocity of circulation and what of constitutes money which, like other assumptions about money, are unlikely to exactly true. </p>

CC BY-SA 3.0
2016-09-12T15:28:16.173Z
2016-09-12T15:28:16.173Z
Henry
<p>The first thing that comes to mind is classical economics' <strong>Say's Law</strong></p>

<blockquote>
  <p>In a market equilibrium, aggregate production will match aggregate quantity demanded.</p>
</blockquote>

<p>In this case, this law on markets could be applied to your money market. Of course, Say's law has its weaknesses and doesn't always uniformly hold, given that markets aren't always in equilibrium. It is probably still a good guiding principle for the money market though. For example, debt and fractional reserve banking seem to indicate, as you note, that money supply doesn't match money demand, but people are consumption smoothing creatures. Their behavior may be matching their demand over multiple periods with supply (their time-path of income) over multiple periods.</p>

<p>A simpler explanation: money supply is also more than just the money base of course. Modern measures of the money supply are meant to capture the reserve rate.</p>

CC BY-SA 3.0
2016-09-12T14:37:10.737Z
2016-09-12T14:37:10.737Z
Kitsune Cavalry
<p>"In theory, we should have enough money in an economy so at current prices we can buy all of the goods and services the economy is producing. What economic theory does this remind you of?" </p>

<p>On a basic level this reminds me of a simple supply/demand equilibrium. In addition, it brings to mind the importance of reserve ratios in banking. As a side note, I also thought banking's use of debt would assert we could not buy every good and service in the economy at this time. </p>

<p>My professor enjoys trick questions. Any thoughts on what I have proposed?</p>

<macroeconomics><microeconomics>
Theory about supply of money, prices, and output?
Anonymous
# Theory about supply of money, prices, and output?

(Asked by: username_0 on 2016-09-12)

"In theory, we should have enough money in an economy so at current prices we can buy all of the goods and services the economy is producing. What economic theory does this remind you of?"

On a basic level this reminds me of a simple supply/demand equilibrium. In addition, it brings to mind the importance of reserve ratios in banking. As a side note, I also thought banking's use of debt would assert we could not buy every good and service in the economy at this time.

My professor enjoys trick questions. Any thoughts on what I have proposed?

**Tags:** macroeconomics, microeconomics

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## 2 answers

### Answer by username_1 on 2016-09-12. Score: 2

To me the key words are "at current prices" and this looks like a quantity theory of money, especially as described by Milton Friedman.

In this theory, if there is too much money then prices will rise, while if there is too little money then prices will fall.

So only if there is enough money (and no more) can we buy *at current prices* all of the goods and services the economy is producing. Without enough money, we cannot buy everything, and with too much there would be excess demand at current prices. This makes various assumptions, for example about stability of the velocity of circulation and what of constitutes money which, like other assumptions about money, are unlikely to exactly true.


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### Answer by username_2 on 2016-09-12. Score: 2

The first thing that comes to mind is classical economics' **Say's Law**

> In a market equilibrium, aggregate production will match aggregate quantity demanded.

In this case, this law on markets could be applied to your money market. Of course, Say's law has its weaknesses and doesn't always uniformly hold, given that markets aren't always in equilibrium. It is probably still a good guiding principle for the money market though. For example, debt and fractional reserve banking seem to indicate, as you note, that money supply doesn't match money demand, but people are consumption smoothing creatures. Their behavior may be matching their demand over multiple periods with supply (their time-path of income) over multiple periods.

A simpler explanation: money supply is also more than just the money base of course. Modern measures of the money supply are meant to capture the reserve rate.


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