The objective of financial policy, at the least in this easy model, would be to impact the interest rate so the interest will impact the standard of planned investment Ip. Even as we change Ip, the effects that are further the same as a modification of federal government investing, G, within the income-expenditure model delivered within the chapters 9 and 10.
Care number 1: that above-described pair of causal links -- through the Federal Reserve to your cash supply towards the rate of interest towards the willingness of capitalists to borrow to fund money investment -- could be the only method this tale works. You are lured to try to make other, more direct links. Resist the temptation. They will be incorrect. For instance there's absolutely no necessary link that is direct a rise in the amount of money supply and more investing. Something that impacts income/output that is national must originate from a improvement in need for goods/services, which must originate from a reason about why C, Ip, or Y can change. Within our easy model, the only link between financial issues and demand is through Ip.
Care number 2: at a far more abstract degree, be mindful to tell apart flows from shares. A movement is any amount that really must be calculated over a length of time. Income is a movement. A stock is any quantity this is certainly calculated at an instant that is single time. The funds supply is just a stock.
Some more samples of stocks versus flows:
Some more samples of stocks versus flows: the total amount of orange juice I drink in an is a flow month. The actual quantity of orange juice we have actually at this time during my fridge is a stock.