ABSTRACT
As we have seen, beginning-of-period stocks of financial assets and scales of plant affect current spending, production, wages, prices, interest rates and exchange rates. Although current interest rates and exchange rates do not affect current wages, prices or production, these rates do influence the amounts of physical capital the governments and the nonfinancial business sectors in both countries accumulate by the end of the period. Current interest rates and exchange rates also affect the number of employees these sectors and the private financial sectors employ by the end of the current period. In addition, these rates affect the nonfinancial business sectors’ orders for the factors they import from each other, as well as their ending inventories of their own privately-produced goods. All of these variables affect next-period’s wages, prices and production. Once current-period interest rates and exchange rates are known, the end-of-period values of all the financial assets are also determined. The stage is set for the determination of a new set of values for the endogenous variables for next period. These values will depend, in part, upon the values established in the current period with respect to the “scales of plant” which the government and nonfinancial business sectors in both countries construct during the current period. Therefore, beginning-of-period stocks of financial assets and scales of plant affect current spending, production, wages, prices, interest rates and exchange rates, which, in turn affect end-of-period stocks and scales of plant and, therefore, future production.
