1. THE COMPLETE “MONEY” MODEL
The Inner Loop
THE COMPLETE “MONEY” MODEL
Rest of the World
Banks & Credit
Fiscal Policy
PrM
Spending
Exports
Investment
Government Purchases
Consumption
LaM
FxM
CrM
TRSY
Foreign Capital
Budget Deficit
Change of Money Demand
Change of Money Supply
Profit, interest, rent
wages
Cash
The FED
(net) Taxes
Imports
Saving
H/B
Income
Money

2. ABBREVIATIONS E I PrM H/B X C Y TRSY T G FxM CrM F S K BB/Def ΔMD ΔMS
The FED
Cash
ΔMD
ΔMS

3. Sometimes we will ignore ΔMD and/or ΔMS
THE FULL CLOSED MODEL
Rest of the World
Banks & Credit
Fiscal Policy
PrM X E I G
FxM K
CrM
BB/Def
TRSY C
Sometimes we will ignore ΔMD and/or ΔMS T
H/B F S Y

4. Often we will ignore the rest of the world
THE TREASURY MODEL
Often we will ignore the rest of the world
Banks & Credit
Fiscal Policy
PrM X I G
CrM
BB/Def
TRSY C
ΔMD
ΔMS
Cash
The FED T
H/B S Y

5. Sometimes we will ignore Fiscal Policy
THE FOREIGN MODEL
Rest of the World
Banks & Credit
Sometimes we will ignore Fiscal Policy
PrM X E I
FxM K
CrM C
ΔMD
ΔMS
Cash
The FED
H/B F S Y

6. No Government or Foreign Sector
THE BASIC MODEL
Banks & Credit
No Government or Foreign Sector
PrM X I
CrM C
ΔMD
ΔMS
Cash
The FED
H/B S Y

7. THE CLOSED MODEL – an important conclusion, Part I
PrM
H/B X C Y
TRSY T G
FxM
CrM F S K
BB/Def
If we start with a given amount of income (Y), we can picture that money flowing through the economy to where it ends up as spending (X).
The rule for this model is: “All the money going into any box will equal the money going out of that box.”
Question: “Is it possible that X is ever different from Y?”
Answer: “X must always be the same as Y in the CLOSED MODEL”
This should sound curious. We have a model that says that total spending (that is, GDP) never changes, when it obviously does in fact change. The model is, nevertheless surprisingly useful particularly as the LONG RUN MODEL.

8. THE CLOSED MODEL – an important conclusion, Part I
PrM
H/B X C Y
TRSY T G
FxM
CrM F S K
BB/Def
“X must always be the same as Y in the CLOSED MODEL”
This is so because the money that leaves Households and Businesses as Income must all go “somewhere.” That money must eventually wind up being spent, since there is nowhere else for it to go.
This should sound curious. We have a model that says that total spending (that is, GDP) never changes, when it obviously does in fact change. The model is, nevertheless surprisingly useful particularly as the LONG RUN MODEL for demonstrating Classical/monetarist theory.

9. THE CLOSED MODEL – an important conclusion, Part II
PrM
H/B X C Y
TRSY T G
FxM
CrM F S K
BB/Def
When we add either of two items to the diagram we get a new conclusion.
With either ΔMD or ΔMS in the model it is now possible for X and Y to be different
FED
ΔMS
Cash
ΔMD
BIG CONCLUSION: In order for GDP (spending) to rise or fall there must be a change in either the money supply or money demand.
This is because money going to and from Cash or the Fed is going and coming from “nowhere.” The money more or less appears and disappears from the economy.

10. The OPEN Model – the Short Run picture
PrM X
Injections = Exports, Investment and Government Purchases
Once we see that X and Y can be different we can build a simpler model. This is particularly useful for the Keynesian, short-run view of the economy. We will divide the economic flows into three parts.
1. Domestic Consumption: this is the part of income that immediately becomes spending. Cd
2. Leakages: these are the parts of income that are not immediately returned to the product market as spending.
3. Injections: these are the parts of total spending other than domestic consumption: the parts of spending that do not immediately arise out of current income.
H/B Y
Leakages = Imports, Saving and Taxes

11. The Three Models The OPEN Model the Short Run The MONEY Model
Injections = E + I + G
The MONEY Model
the versatile one. This one can do what either of the others can
PrM
H/B X Cd Y E I
PrM
H/B X C Y
TRSY T G
FxM
CrM F S K BB
FED
ΔMS
Cash
ΔMD
Leakages = F + S + T
The CLOSED Model
the Long Run E I
PrM
H/B X C Y
TRSY T G
FxM
CrM F S K BB