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11. Money and Its Purchasing Power

1. Introduction

MONEY HAS ENTERED INTO ALMOST all our discussion so far. In chapter 3 we saw how the economy evolved from barter to indirect exchange. We saw the patterns of indirect exchange and the types of allocations of income and expenditure that are made in a monetary economy. In chapter 4 we discussed money prices and their formation, analyzed the marginal utility of money, and demonstrated how monetary theory can be subsumed under utility theory by means of the money regression theorem. In chapter 6 we saw how monetary calculation in markets is essential to a complex, developed economy, and we analyzed the structure of post-income and pre-income demands for and supplies of money on the time market. And from chapter 2 on, all our discussion has dealt with a monetary-exchange economy.

The time has come to draw the threads of our analysis of the market together by completing our study of money and of the effects of changes in monetary relations on the economic system. In this chapter we shall continue to conduct the analysis within the framework of the free-market economy.