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Inhaltsverzeichnis

Frontmatter

1. Conventional Macro Models and Aggregate Economic Choice

Abstract
Frequent references to economic analysis as the “theory of choice” notwithstanding, macroeconomists generally take a severely limited view of the degree of choice available to private economic agents. Portrayed as price takers buffeted by the dictates of a policy authority, private agents in conventional macro models directly decide only the quantities of labor, privately-produced goods and nonmonetary financial assets. A fictitious auctioneer announces all wages, prices, and interest rates while an outside policy authority determines the levels of government-produced goods, taxes, and the stock of nominal money. Furthermore because existing models typically prohibit private agents from engaging in transactions until the auctioneer has set all wages and prices at their “market clearing” levels, they cannot explain the existence of involuntary unemployment if wages and prices are free to vary. Consequently several assumptions underlying conventional macro models drastically reduce their ability to explain important aggregate economic phenomena.
Harland Wm. Whitmore

2. The Basic Structure

Abstract
The complete model of the closed economy developed in this study contains five centralized decision-making units interacting in nine markets. The non-financial markets include those for labor, consumption goods (nondurables), and capital goods. Separate financial markets exist for checkable deposits, advances, IOU’s issued by the household sector, government bonds, equity shares issued by the private nonfinancial business sector, and equity shares issured by the private financial sector. Together these markets simultaneously comprise a market for high-powered money. The model also contains non-market mechanisms through which the household sector produces some of its own services and selects the optimal volume of public goods to be produced by the government. Figure 2.1 provides a visual overview of the closed economy as described in this study.
Harland Wm. Whitmore

3. The Household Sector in the Simple Model

Abstract
The simple national income model developed in Chapters 3–5 contains two centralized decision-making units participating in four markets. The household sector, discussed in the present chapter, purchases commodities and equity shares from the nonfinancial business sector. The business sector presented in Chapter 4, buys labor services from the households. Currency, the only type of money in this simple framework, is exchanged in all three of the commodity, equity, and labor markets. Consequently these three markets taken together simultaneously constitute a market for currency. Chapter 5 combines the household and business sectors into a simple model of national income determination with the prices of labor, commodities, and equity, set by the business sector.
Harland Wm. Whitmore

4. The Nonfinancial Business Sector in the Simple Model

Abstract
The nonfinancial business sector presumably formulates its plans at time t so as to maximize its present value. Because the number of its equity shares outstanding at time t is given, this objective is tantamount to maximizing the price which those people who hold its shares at time t could receive for their shares if they were to sell them at time t. But, since all households are viewed as belonging to a single decision-making unit, any trading in existing shares at time t among households presumably fails to affect aggregate behavior. Consequently in this model the price of an existing share at time t remains a shadow price.
Harland Wm. Whitmore

5. National Product and the Dynamic Properties of the Simple Model

Abstract
Equations (3.26) – (3.28) above depict the household sector’s demand functions for commodities, currency and equity shares. Equation (3.29) portrays its supply of labor function. The business sector’s price-setting functions for labor (wt+1), equity shares (pn t) and commodities (pc t) are provided by expressions (4.39), (4.41) and (4.44) respectively. The remaining equations in the set numbered (4.37) – (4.45) represent the business sector’s desired levels of labor (current hours and future employees), currency, current production, (real) sales and current dividends. These equations are combined in the present chapter to form a simple model of national income and product. To complete this model, the actual end-of-period stocks and the actual quantities traded also must be specified. These issues will be addressed before presenting the entire model.
Harland Wm. Whitmore

6. Government Activity and Aggregate Economic Choice

Abstract
The traditional approach to incorporating government activity into macroeconomic models views the government as an autonomous agent who manipulates government spending and taxes in order to achieve desired changes in national income, prices or economic growth. In the conventional model, government spending (to the extent it does not “crowd out” private spending) serves only to generate earned income (and national product) to the factors which are used to produce the goods or services purchased by the government. The standard model ignores the usefulness to the private sector of any goods or services which the government provides as a result of these purchases. Consequently it cannot address the factors that affect the private sector’s willingness for the government to engage in spending.
Harland Wm. Whitmore

7. 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).
Harland Wm. Whitmore

8. Household Sector Behavior in the Expanded Model

Abstract
In the expanded model currently under construction, the household sector faces a variety of decisions at time t with respect to its activities in the labor, commodity and financial markets. It must decide the number of people who will attempt this period to find jobs for next period, the volume of consumption goods it will buy, the amount of physical capital it will accumulate, the amount it will borrow from depository institutions, as well as the amounts of currency, checkable deposits, and equity shares it will hold at the end of the current period. In the simple model, presented earlier, the household sector purchased equity shares only from private nonfinancial businesses. However in this expanded version it also buys shares from private depository institutions. Because household expenditures on capital goods are assumed to be too large to be financed out of current household saving (defined as current disposable income less current expenditures on consumption goods), the sector presumably finances its capital goods expenditures by borrowing from the private depository institutions.
Harland Wm. Whitmore

9. The Nonfinancial Business Sector in the Expanded Model

Abstract
The model of the nonfinancial business sector presented in this chapter extends the one developed in Chapter 4 by allowing the sector to produce capital goods as well as consumption goods. Consequently in addition to the decisions confronting it in Chapter 4, the sector now must determine (at least tentatively) how many capital goods it will produce in both the current and next periods as well as how many of the capital goods it produces this period it will sell to the household or government sectors and how many it will acquire itself in order to facilitate next period’s production.
Harland Wm. Whitmore

10. The Private Financial Sector

Abstract
The private financial sector in this study consists of depository institutions behaving as though they were a centralized unit. The objective of this sector at time t is to maximize its present value. It formulates its plans for the “current” and “next” periods in a manner that maximizes the amount which its shareholders would have to place in their next best alternative (presumably in equity shares issued by the nonfinancial business sector) at time t in order to duplicate (period by period) the income which the private financial sector contemplates distributing to its owners over each of the next two periods.
Harland Wm. Whitmore

11. The Central Bank

Abstract
The world’s central banks currently operate under a philosophy of control rather than accommodation. According to the implicit assumption underlying this philosophy, a central bank somehow possesses superior information, knowledge, or ability to determine the appropriate level of whatever economic variable(s) it seeks to control. Consequently it is justified in attempting to prevent or offset business conditions it considers adverse and to promote conditions it deems desirable. In the U.S., for example, the Federal Reserve is allowed to select from an array of potentially conflicting goals the rate of inflation, level of unemployment, rate of economic growth, or the exchange rate it considers best for the economy. It neither consults a constituency in making its selection nor offers any specific information to the private sector either as to its long-run objectives or as to precisely how it expects to attain those objectives. It does announce broad ranges for twelve-month target rates of growth for several monetary arrgregates. But it is not uncommon to find one or more of these aggregates lying outside is targeted range. Becasue the Fed does not reveal the extent to which it is committed to keeping these measures within their targeted bounds, the financial markets must continually guess what the Fed will or will not do next.
Harland Wm. Whitmore

12. The Complete Model of a Closed Economy

Abstract
The models of the five individual optimizing sectors presented in Chapters 7–11 provide the basis for the unified model of collective economic choice developed in the present chapter. This combined model contains markets for consumption goods, capital goods, labor, equity shares of the private financial sector, equity shares of the nonfinancial business sector, personal loans, checkable deposits, government bonds and advances. Together these markets also constitute a market for high-powered money.
Harland Wm. Whitmore

13. Model of a Large Open Economy

Abstract
The theoretical construct presented in this chapter contains the five domestic decision-making units analyzed in Chapters 7–12 plus a foreign sector. Four of the five domestic sectors interact with the foreign sector through the product and financial markets. The domestic household and government sectors purchase not only domestically-produced consumption and capital goods but also foreign-produced commodities. The private nonfinancial business sector also imports commodities from the foreign sector. Domestic private depository institutions, domestic nonfinancial businesses and the domestic government sector carry out transactions involving foreign exchange. They also hold deposits denominated in foreign exchange at foreign depository institutions. The “rest-of-the-world” or foreign sector holds checkable deposits denominated in the domestic currency at domestic private depositiory institutions. The foreign sector also holds bonds issued by domestic borrowers and buys goods produced by domestic firms. Domestic private depository institutions hold both domestic and foreign bonds. The only domestic decision-making unit not engaging in transactions with the foreign sector is the central bank. It continues to deal only with domestic private depository institutions. Furthermore, no foreign firm or worker attempts to buy or sell labor in the domestic economy and no domestic firm or national enters the foreign labor market. Foreign commodity prices, foreign bond prices and interest rates on checkable deposits at foreign banks are treated as exogenous.
Harland Wm. Whitmore

14. Conclusion

Abstract
This study represents an attempt to construct an aggregate disequilibrium model of economic choice in which every wage, price, interest rate and even the economy’s exchange rate is set by some optimizing economic agent. Because no sector possesses complete knowledge, the price-setters in this study may find that they are selling more or fewer goods, purchasing more or fewer government bonds, granting more or fewer personal loans, selling more or fewer equity shares, issuing more or fewer checkable deposits and buying more or less labor or foreign exchange than they anticipated when they set their prices.
Harland Wm. Whitmore
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