How_Money_Works_-_The_Facts_Visually_Explained

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Economic theories

and money

Since the birth of modern economic thought, economists have tried

to work out how the quantity of money in an economy affects prices

and the behavior of consumers and businesses.

Keynes’ general

theory of money

In his 1935 book General Theory, John Maynard Keynes

argued that government spending and taxation levels

affect prices more than the quantity of money in the

economy. He proposed that in times of recession a

government should increase spending to encourage

employment, and reduce taxes to stimulate the economy.

Fisher’s quantity theory of money

The most common version of this theory was articulated

by Irving Fisher, who argued that there is a direct link

between the amount of money in the economy and price

level, with more money in circulation increasing prices.

Marx’s labor theory of value

The German economist Karl Marx argued that the real

price (or economic value) of goods should be determined

not by the demand for those goods, but by the value of

the labor that went into producing it.

GOVERNMENT

When output is shrinking and

unemployment rising, a government

must decide how to react.

INVESTMENT AND SPENDING

As demand falls, firms reduce

production, which raises

unemployment and lowers demand.

STIMULATING DEMAND

The government increases its spending,

for example on infrastructure. This

reduces unemployment.

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at $10 / hour

10 hours’ labor

at $10 / hour

$20

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Low money

supply

Demand for

money rises

High demand

increases value

Money buys

more goods

$10

$15

Money buys

fewer goods

Low demand

decreases value

High money

supply

Demand for

money reduces

US_022-023_Economics_and_money.indd 22 13/10/2016 16:15