Abstract
A dynamic model is constructed in which the behavior of economic agents is based on adjustment. Decisions are made in disequilibrium: prices respond to differences between supply and demand (inventories), capital is moved according to profitability differentials, and money is issued by a bank which reacts to the general price level. A proof of local stability of long-term equilibrium with production prices is demonstrated. We further distinguish between two aspects of the stability problem: concerning the allocation of capital and relative prices, “stability in proportions”, and with respect to the general levels of activity and prices, “stability in dimension”.
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