TIEING LOOSE ENDS IN MONETARY THEORY
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« p » indicates the commodity price level, « l/r » the reciprocal of the market rate of interest, « w » the money price of inputs, and « r » the
market rate of interest. The notation B;	for example, states that the
demand for bonds is a function of the reciprocal of the market interest rate. Both demand and supply functions when plotted against « own » prices can be positively sloping since the quantity axis is measured in dollars rather than physical quantities.
The cells along the diagonal of the matrix represent each market's « own » submarket. The first value, PP would embrace primarily the business sector, signifying the use of retained business earnings to buy output (investment goods) (6). The PP submarket can reflect unplanned depletions or increases in inventories, with the size of PP being decreased in the former case and increased in the latter. These diagonal elements are common to both the demand and supply sides of a given market and as a resuit they do not determine prices.
The equilibrium condition in each market is that the excess demands in the submarkets other than the « own » submarket should sum up to zéro. In the product market, for example, the equilibrium condition is that (BP — PB) + (LP — PL) + (MP — PM) equal zéro. Assuming that the first three markets clear, since the fourth market is made up of a subset of the submarkets of the first three markets, the solution for the fourth market is given once the solution is known for the first three markets.
An important characteristic of the flow-of-funds framework is the comprehensiveness of its transactions coverage in the market for financial claims (the « bond » market). The demand and supply functions in the bond market describe the purchase and sale of both « old » and « new » financial claims per period of time. The sale of old financial claims (non-monetary financial dissaving) may be related to variables other than those influencing the sale of new financial claims. The diagonal term in this market, BB, varioucly describes sectors' shifting among financial assets or refunding-type transactions. It also includes the borrowing-lending activities of financial institutions—the sale of their own liabilities for the sake of financial investment.
Since the inventory concept is out of place in the bond market, ex post identities are established in a différent way from the product market.
(6) If the output market were treated in grosser foshion, the PP element includes inter-firm transactions in intermediate products (an interindustry matrix).
1974 - Rivista Internazionale di Scienze Economiche e Commerciali - n. 3
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