The Free Market Center
The Free Market Center
Shoe Productivity Increases | 2.00%/Month |
Wheat Productivity Fixed | 0.00%/Month |
Money Supply Fixed | 0.00%/Month |
To establish a base from which to make comparisons of money prices we start with the same level of production growth while maintaining a fixed money supply.
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With a fixed money supply and a monthly increase in the production of shoes we begin to see some interesting things happen.
As production increases shoes sales also increase (blue line), as we would expect. At the same time the dollar price per pair of shoes declines (red line). The change in shoe productivity has no effect on the production, sales or dollar price of wheat.
With the supply of money fixed, the decline of shoe dollar prices informs the market that shoe production has increased relative to wheat.