7. Theories of Money and Prices

In this chapter, the author explores the many facets of money and how it does (or does not) impact prices in an economy. The nature of money together with its origins are examined, and fiat money is discussed. This is followed by a discussion of how money is created in a modern banking system and how it is distributed between various economic groups. The money multiplier, as it is found in many mainstream textbooks, is then discussed and dismissed as being unrealistic. Various components of inflation are then discussed and examined against the backdrop of the actual empirical example of the 1970s inflation in the USA. Finally, the implications of the chapter for the famous ISLM macroeconomic model are examined.