The role of money in the economy is a significant factor affecting the values of goods and services. Money is regarded as a veil that merely preserves real values. Poor sales performance is often attributed not to a lack of money in the market but rather to a shortage of goods or services. The value of money is determined through agreements between sellers and buyers. If a seller provides more goods for the same amount of money or asks for less money for the same quantity of goods, the value of money increases. Conversely, if a seller provides fewer goods for the same amount of money or asks for more money for the same quantity of goods, the value of money decreases. Thus, the value of money is determined by supply and demand. The circulating money supply of a country generally changes parallel to the quantity of goods available. As a country's production increases, the money supply and total demand usually increase as well.
Classical economists explain fluctuations in the general price level through the Quantity Theory of Money: if the circulating money supply increases more than the quantity of goods and services, prices rise; if the circulating money supply increases less than the quantity of goods and services, prices fall.
According to Say's Law, the money which is necessary to finance production automatically generates sufficient purchasing power for the goods produced, ensuring overall supply and demand equilibrium in the economy. Considering money as a neutral tool for adjusting market values and bringing the economy into balance is a fundamental tenet of classical economic thought, suggesting that economic fluctuations usually arise as a result of external interventions inhibiting the functioning of price mechanisms.
