Fixed Production & Sales — Description

What happens with fixed production & sales?

I think you can already predict what will happen to most of the elements in the three simulations in this first scenario. Sales of both products will remain flat, and direct exchange prices will not change. I do believe, however, that you will find the comparison of money prices to set the stage for the other three scenarios in the simulation.

Variables

Note: In the next three scenarios the description tab will give you values to set for the annual fractional shoe increase and the annual fractional wheat increase. You can leave those values set for the three simulations within each scenario. In this first scenario you can leave those values set at zero.

Set for this scenario

You should set these values before the first simulation, and leave them during succeeding simulations in this scenario. [Note: For this first scenario (Fixed Production & Sales), no changes necessary.]

annual fractional shoe increases: 0.0 [Unitless] Set and leave for these simulations
annual fractional wheat increases: 0.0 [Unitless] Set and leave for these simulations

Adjust this variable as instructed

For each of the three simulations within each scenario you will be given values to adjust for the annual fractional money increase rate. You'll need to set those values to generate the appropriate results within each simulation.

annual fractional money increase rate: [Default] 0.0/Year

GIF89a

Fixed Money Supply - Simulation 1

For this first simulation leave the annual fractional money increase rate at zero. Click the run simulation button to view the various simulation results based on the variable values in the model.

Note: within each scenario you can see each of the simulations for the purpose of comparison, by clicking the minimize or restore buttons in the upper right-hand corner of the simulation window. If you close the simulation window, you will not have it available for comparison.

Find brief descriptions of the tabbed panels in the left-hand column below.

Variables to Adjust

annual fractional money increase rate: 0.0/Year

Simulations

Sales: Sales of shoes and wheat remain fixed for the 60 month period. Note: Read shoe sales on the left scale and wheat sales on the right scale. Also, notice that scales vary with the range of values, which causes sales lines to overlap in this scenario.
Inventories: Rise steadily for both products. Note: Read shoe inventory on the left scale and wheat inventory on the right scale. Also, notice that scales vary with the range of values, which causes inventory lines to overlap in this scenario.
Direct Exchange Prices: The direct exchange prices, for both products, remain the same throughout the simulation. Wheat prices: pair/bushel. Shoe prices: bushels/pair.
Money Supply: The quantity of money remains the same ($10,000) for the whole 60 months.
Dollar Prices: Dollar prices, for both products, remain the same throughout the simulation.
Price Conversion: The conversion from dollar prices to direct exchange yields the same direct exchange prices as when calculated directly.

Comments:

The boring results from this simulation provide an important backdrop for the rest of the simulations in this exercise.

With no fractional rates of change introduce into the model all values remain flat with the exception of inventories, which, as a level, rise as a result of the accumulation of the different flow rates for production and sales.

Please take the time to understand the direct exchange prices and the dollar prices before you move on. Without the influence of other variables the relationships of these exchange rates become more apparent.

How many pairs of shoes for a bushel of wheat?
How many bushels of wheat for a pair of shoes?
How many dollars for each of the other products?

Increasing Money Supply - Simulation 2

In this simulation we're going to increase the money supply incrementally over the period lasting for 40 months between month 10 in mind 50. To run the simulation, first adjust the annual fractional money increase rate to 0.07 (per year) (that is the third variable in the right-hand panel in the Insight Maker model). Then, click the run simulation button.

Note: To enter the variable values for these simulations you may find it easier to enter the number in the data box to the right of the slider.

Variables to Adjust

annual fractional money increase rate: 0.07/Year

Simulations

Sales: Same as simulation 1.
Inventories: Same as simulation 1.
Direct Exchange Prices: Same as simulation 1.
Money Supply: The quantity of money (dollars) remains the constant ($10,000) for the first 10 months; it then increases steadily (at 7% per annum) for 40 months; and it levels off again for the last 10 months.
Dollar Prices: The dollar prices remain level, as one would expect, for the first 10 months; they then rise steadily, in spite of the fixed rates of production and sales, for the next 40 months; finally, they level off, at a higher level, for the last 10 months. Note: Prices rise at the same fractional rate. The different scales make them look different.
Price Conversion: Same as simulation 1.

Comments:

With the increases in the quantity of money we get a first glimpse of the effect that those increases have on dollar prices. Click back to the tab (on the simulation) for Direct Exchange Prices. You will see that they remain unchanged while dollar prices seem to indicate something else.

I will get to distortion of price signals later.

Next, run the deflation simulation.

Decreasing Money Supply - Simulation 3

To run this simulation change the annual fractional home money increased rate from 0.07 to -0.07. You can do this by simply adding an - before the value used in the preceding simulation.

Variables to Adjust

annual fractional money increase rate: -0.07/Year

Simulations

Sales: Same as simulation 1.
Inventories: Same as simulation 1.
Direct Exchange Prices: Same as simulation 1.
Money Supply: The quantity of money (dollars) remains the constant ($10,000) for the first 10 months; it then decreases steadily (at -7% per annum) for 40 months; and it levels off again for the last 10 months.
Dollar Prices: The dollar prices remain level, as one would expect, for the first 10 months; they then decline steadily, in spite of the fixed rates of production and sales, for the next 40 months; finally, they level off, at a lower level, for the last 10 months. Note: Prices decline at the same fractional rate. The different scales make them look different.
Price Conversion: Same as simulation 1.

Comments:

What effect does the decline in the quantity of money have on dollar prices? Direct exchange prices remain the same.

As with inflation prices trend in the same direction as the trend in the quantity of money.

The value of dollars has changed, causing prices to change. What effect does this have on market activity?

Fixed Production & Sales - SUMMARY

Production & Sales Assumptions

Shoe Production & Sales: no change
Wheat Production & Sales: no change

Fixed Money Supply

In the context in which production and sales remain flat, a fixed money supply provides us with the simplest example of the relationship between money prices and the information they provide about products sold in the market. In this case, sales remain flat therefore prices remain flat.

Inflation: Expanding Money Supply

This time, in the same context of steady production and sales, we see clearly how an expansion in the quantity of money causes money prices to give us faulty information about production and sales trends.

Deflation: Contracting Money Supply

The contracting money supply also distorts the information that money prices provide about the trends in production and sales. In this case money prices fall while production and sales remain the same.

Notice: Dollar prices of individual goods, in this fixed money quantity scenario, move independently. This makes the odds of a general dollar price increase and decline (the popular definition of "inflation" and "deflation") very unlikely—without some other influence.

Summary Comments

We can safely say the production and sales of any products do not remain constant for very long. But, setting up a model in which only the supply of money varies gives a quick view in the way in which the quantity of money distorts the information flow in a market by distorting market prices.

Keep in mind as you work your way through the succeeding models that actors in the market have only prices by which to judge the quantities of products that buyers and sellers exchange in the marketplace.

Now, let's look at increasing production...