It is easy to represent the ‘income-expenditure model’ in a graph. Some people find this helpful as a visual aid to understanding; others, not so much. For those who find graphs confusing, this post can safely be ignored. In terms…
We have seen that the ‘income-expenditure model’ combines key macro identities (introduced in parts 7 and 15) with particular behavioral assumptions to provide a theory of income determination (considered in parts 16 and 18). The behavioral assumptions relate to causation.…
In this and upcoming parts of the series, we will look in a little more detail at the ‘income-expenditure model’. The foundations of the model have been introduced in the previous two parts (here and here).
Equilibrium is conceived as a position of stability at which the plans of economic agents (for example, households and firms) are ‘realized’ or compatible, so that there is no incentive to alter current behavior.
We have seen that total spending equals total income (part 4). It has been argued that it is spending that creates (or determines) income (part 9). This can be inferred from the observation that some spending can occur independently of…
We saw, in part 14, that government spending increases the net financial assets of non-government, whereas taxes do the reverse. The level of net financial assets at a point in time is a stock. The change in net financial assets…
Now that we have introduced ‘government money‘ and ‘commercial bank money‘, we are in a position to understand in basic terms how fiscal policy (government spending and taxing) is conducted and its direct financial effects. At this stage, the treatment…
We have seen that a national currency enters the economy when government spends, and that the recipients of the government spending can use the currency for various purposes, including to purchase goods and services. Government is therefore an original source…
We saw in part 2 that to establish a currency, government needs to do three things: 1. Define a unit of account (e.g. dollar). 2. Impose taxes that can only be paid in that unit of account. 3. Spend or…
Money can be thought of as an IOU (“I owe you”), denominated in a nation’s money of account. The issuer of an IOU can buy goods or services from anybody who is willing to accept the IOU as payment.
