CH. 21

THE THEORY OF PRICES

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period. We have full employment when output hasrisen to a level at which the marginal return from arepresentative unit of the factors of production hasfallen to the minimum figure at which a quantity ofthe factors sufficient to produce this output is available.

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When a further increase in the quantity of effectivedemand produces no further increase in output andentirely spends itself on an increase in the cost-unitfully proportionate to the increase in effective demand,we have reached a condition which might be appro-priately designated as one of true inflation. Up tothis point the effect of monetary expansion is entirelya question of degree, and there is no previous pointat which we can draw a definite line and declare thatconditions of inflation have set in. Every previousincrease in the quantity of money is likely, in so far asit increases effective demand, to spend itself partly inincreasing the cost-unit and partly in increasing output.

It appears, therefore, that we have a sort of asym-metry on the two sides of the critical level above whichtrue inflation sets in. For a contraction of effectivedemand below the critical level will reduce its amountmeasured in cost-units; whereas an expansion ofeffective demand beyond this level will not, in general,have the effect of increasing its amount in terms of cost-units. This result follows from the assumption that thefactors of production, and in particular the workers, aredisposed to resist a reduction in their money-rewards,and that there is no corresponding motive to resist anincrease. This assumption is, however, obviouslywell founded in the facts, due to the circumstance thata change, which is not an all-round change, is beneficialto the special factors affected when it is upward andharmful when it is downward.

If, on the contrary, money-wages were to fall with-