The present chapter combines the circular flow approach to money (featured in the last chapter) with the stock approach. In the circular flow approach, money is a device allowing transactions between agents to take place and illustrates Keynes’s famous ‘transactions’ motive for holding money. In the stock approach, money is seen as a financial asset which agents hold for investment purposes, or more precisely, as a placement as French scholars and Joan Robinson (1956: 8) say. The quantity of money held depends, in particular, on the rate of interest that can be obtained on other assets — an approach associated with Keynes’s ‘speculative’ and ‘precautionary’ motives. Agents make a portfolio choice between money and other possible financial assets. For this reason, the model developed in Chapter 4 is called Model PC, for portfolio choice.
KeywordsInterest Rate Central Bank Money Supply National Income Disposable Income
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