In this section I have added an increasing money supply as an influence on the dollar price of the two goods in the model.

Remember from the fixed money supply scenarios that, when the money supply does not change, changes in dollar price have an inverse relationship to changes in production and sales. Thus, when prices rise they signal the market of declining production and sales—frequently an opportunity for entrepreneurs. When prices fall they signal the market of increasing production and sales.

When money increases steadily it tends to push dollar prices up. In the case of steady production, when dollar prices should have remained constant, they actually rose. Even when production rose dollar prices increased in response to the increased quantity of money.

You can already see how changes in the quantity of money in the system distorts the information which dollar prices should convey.

---

Over the last several years (prior to 2008) increasing money supply has driven house prices up artificially. Rising prices have signaled to builders of a relative shortage in housing, which did not exist, causing them to build more houses than the market could absorb. Eventually the housing market had to crash. It had grown in order to satisfy a phony demand.

---