chapter  Lecture 20
18 Pages

A Model of the Price-production Cycle

This chapter describes the heuristic considerations of the proceeding Lecture in a formal model. In order to obtain a purely aggregate cycle at the equilibrium price level that the model has a high degree of symmetry. The chapter constructs a production-inventory model much like that studied in Lectures 5-7 with certain modifications occasioned by the occurrence of money in the model. Exchange is assumed to be conducted in terms of money units, the total money supply being m. The firms also employ labor, which is paid at a given money wage rate w. The firms producing a given commodity must pay on the morning of the tth day for the material inputs to production which they will require for the day's production; these payments must be made out of the total inventory of money which each firm finds on hand.