ABSTRACT
The analysis presented in Chapters 5–7 provides the foundation not only for the demand and supply functions for financial assets and foreign exchange, but also for ending inventories and the components of aggregate demand, all of which are influenced by interest rates and exchange rates during the current period. By the beginning of this chapter, both government sectors have announced the number of public goods they will each produce next period as well as next-period’s taxes. They have also decided how many hours they will use their current employees this period. But the governments still must decide the optimal combinations of labor and capital with which to produce next-period’s public goods. These optimal combinations will be jointly determined with current interest rates and exchange rates.
