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Basic Concept of Microeconomics

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Inflation was origin by a combination of four factors. Those factors are:

• The supply of money goes up.
• The supply of goods goes down.
• Demand for money goes down.
• Demand for goods goes up.

You should think that the demand for money could be infinite. Who doesn't want more money? The key thing to keep in mind is that wealth is not money. The collective demand for wealth is unlimited as there is never sufficient to satisfy everyone’s desires. Money, as defined in "How much is the per capita money supply in the U.S.?" is a narrowly described term which adds things like paper currency, traveler’s checks, and savings accounts. It doesn't add things like stocks and bonds, or forms of wealth like homes, cars and paintings. Since money is only one of various forms of wealth, it has bounty of substitutes. The interaction between money and its alternates explain why the demand for money changes.

We'll look at a few issues which can cause the demand for money to change. Two of the more significant stores of wealth are bonds and money. These two items are alternates, as money is used to purchase bonds and they are redeemed for money. The two differ in a few ways. Money usually pays very little interest (and in the case of paper currency, none at all) but it will be used to purchase services and goods. Bonds do pay interest, but will not be used to make purchases, as the bonds have to be converted into money. If bonds paid the similar interest rate as money, nobody could purchase bonds as they are less convenient than money. Since bonds give interest, people can use some of their money to purchase bonds. The higher the interest rate, the more striking bonds become. So a rise in the interest rate sources the demand for bonds to rise and the demand for money to fall since money is being replaced for bonds. So a fall in interest rates causes the demand for money to go up.

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