ABSTRACT
In this chapter we extend the MF model in yet another direction, this time by incorporating wealth into the model in a relatively simple way. Wealth is now allowed to influence both expenditure and the demand for money. In Chapter 10, where we introduced the portfolio balance model, we showed how wealth appeared in the monetary sector. This chapter adopts the portfolio balance of Chapter 10, now incorporating it into a larger model. This also serves to correct one important deficiency of the MF model noted in Chapter 7: in the MF model, it will be recalled, asset demands are not explicitly modelled; moreover, there is an underlying inconsistency between the stock money demand and the flow demand for foreign assets. Bonds were only implicitly represented in the model.
