as a result, money bears a nominal feature, as against the real feature borne by other goods and services. that is why any value measured in terms of money is also known as a nominal value. we may illustrate the role played by money in an economy by considering the operation of a simple economy where there are only two commodities, say, coconuts and money. everybody has to use money to get coconuts or use coconuts to get money so as to store their wealth ( for getting coconuts in the future ). suppose there were 10 coconuts and 100 units of money. then, each coconut has to be exchanged for 10 units of money per coconut. now, suppose, through a miracle, the money endowment of people doubles to 200 units, while the number of coconuts remains unchanged at 10. then, the price of coconuts in terms of money rises to 20 units from the earlier 10 units. what has happened here is that when the amount of money doubled, while the production of coconuts had remained unchanged, the prices too have doubled. what would happen to the price level, if the number of coconuts too doubled along with the doubling of money? then, 20 coconuts would be exchanged for 200 units of money. hence, the price level would remain unchanged at 10 units of money per coconut. now, suppose that the number of coconuts doubles to 20, while the amount of money remains at 100 units. in this case, the price level has to fall from 10 units of money to 5 units of money. let ’ s consider one more possibility. suppose that there has been a merciful hurricane and it destroys exactly a half of the original number of coconuts, leaving the balance half intact for use by people. now, in this economy, there are only 5 coconuts against 100 units of money. it is not difficult to discern that the prices would rise to 20 units of money per coconut. what would happen if the amount of money too is raised to 200 units in this scenario? then, the price of coconut would skyrocket to 40 units of money. what was considered here was a very simple economy for ease of clarity. but, the broad results derived are equally valid to a modern economy with billions of transactions. these results can be summarized as follows : first, if the money supply increases, while the output remains unchanged, then, the general price level will tend to increase. second, if the money supply increases at the same rate as the

clarification, since it was not in line with the accepted international trend. the writer recalls that even the resident representative of the imf too was puzzled by this seemingly inappropriate mandate being added to the bank ’ s objectives. but, mr. jayawardena, assuming his usual erudite and serious posture, offered a different explanation which had never occur red to the technical staff. the writer recalls him saying “ … if you have only price stability, then you would fall into the trap of attempting to stabilize a price index which is not what is meant by price stability, in the context of a central bank. the attainment of price stability for a central bank means elimination of both excess demand and excess supply in the market so that the market is free of potential inflationary or deflationary pressures ” at that time, many in the central bank, including the present writer, did not fully understand the wisdom enshrined in that statement. it even led to confusion by many that the bank had been mandated to stabilize the growth rate as well, in addition to the stabilization of prices. accordingly, some even charged that the bank had failed in its tasks, when there was a negative growth in the economy in 2001. in hindsight, it can now be discerned that mr. jayawardena ’ s wisdom was to present the price stability in its totality rather than as a sub part of the issue. we could illustrate this point as follows : an economy produces goods and services, numbering millions, for use by its members. the total of these goods and services, when they are offered in the market, is called the aggregate supply. this aggregate supply consists of real goods and services which the users can consume or use as inputs for further production. hence, it is known as a real quantity, quite distinct from an imagined or assumed quantity. this real quantity has to be exchanged among members of the society. since it is practically impossible to trade one commodity for another commodity in a modern complex economy, there arises the need for adopting a common medium of exchange. “ money ” offers the service of this common medium of exchange at the cheapest cost to conclude the transactions running into billions. money, unlike the real commodities, is a peculiar animal. its usefulness arises from its ability to acquire real goods and services which people can enjoy. if money does not have this ability, no one would be interested in having money. hence, the value given to money is simply an imaginary value.