The ‘Complete’ Model with a Wealth Effect
The final version of the synthesis model which we consider introduces the wealth effect. It differs from the real balance effect model in Section 6.1 in an important respect. In that model the only form in which wealth could be held was money. Once the demand for money is interest elastic, the former treatment is no longer sufficient, for the model includes bonds. It is important to stress that the inclusion of bonds as part of wealth is not arbitrary, but logically necessary. If the demand for money is interest elastic, then there are bonds in the system and these bonds are part of wealth; if the demand for money is not interest elastic, then one is back to the naïve ‘classical’ model of Chapter 5.
KeywordsInterest Rate Price Level Money Supply Excess Demand Full Employment
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Note and References
- 6.Hahn provides a clear and concise discussion of the implications of bankruptcies. At the end of the treatment, he writes, ‘I conclude from all this that the assertion that the “Pigou effect” ensures the existence of an equilibrium is unproven’ (Frank Hahn, ‘Some Problems of Proving the Existence of Equilibrium in a Monetary Economy’, in F. H. Hahn and F. P. R. Brechling (eds), The Theory of Interest Rates (London: Macmillan, 1965 p. 135).Google Scholar