The Government Sector in the Expanded Model

Abstract

As discussed in Chapter 2, the expanded model, which we begin to develop in the present chapter, contains two new sectors (depository institutions and a central bank) in addition to the three sectors contained in Chapter 6. Before specifying the behavior of these new sectors in Chapters 10 and 11, the present chapter and the next two are devoted to reformulating respectively the behavior of the government, household and nonfinancial business sectors within the context of the expanded framework. The model present in Chapter 6 contained only three markets (labor, consumption goods and equity shares issued by the nonfinancial business sector) which together simultaneously constitutes a market for currency. The model developed in this and the next four chapters contains markets for labor, consumption goods, capital goods, bonds, personal loans, checkable deposits, advances from the central bank, equity shares issued by the nonfinancial business sector and equity shares issued by the private depository insitutions. Together these nine markets simultaneously constitute a market for high-powered money (consisting of currency held outside the central bank and the private depository institutions plus the reserves of the private depository institutions).