Money and Prices in the Long Run
Money is a good that satisfies human wants and needs. It is a good that is used as a medium of exchange, a unit of account, and a standard of value in economic transactions. The primary functions of money are distinguished as: a medium of exchange, a unit of account, and a standard of price. As a medium of exchange, money is accepted as a means of payment for goods and services. In this function, it is the most important tool for the aggregation and disposal of the goods and services produced in a society. As a unit of account, money enables the economic transaction of goods and services. In this function, it is a common tool for the measurement of wealth, price, and financial worth. As a standard of price, money is a common standard for pricing the worth of goods and services within an economy. In the long run, prices will be determined by the laws of supply and demand, which in turn are determined by the amount of money in circulation, the real exchange rate, and the velocity of circulation of money. If there is an increase in the amount of money, then prices will be higher. If the velocity of circulation of money decreases, then prices will fall. If the real exchange rate rises, then prices will fall.