The Basic Market-Clearing Model

In Chapter 2, we considered how isolated households chose their work effort and thereby their production of commodities. With no possibilities for trades with other households or for storing goods, production was equal to consumption for each household. In Chapters 3 and 4, we allowed people to buy and sell goods at the price P and to borrow and lend at the interest rate R. With these market opportunities, a household could save or dissave, so that consumption and production need not be equal in every period. The accumulation of saving over time determined a household’s stock of financial assets, which could be held as money or bonds, and we studied how savings are allocated between these two assets.