Week 5 Homework: Problem Set 4 Problem 2

The assignment was to explain/justify the lines within the SIM Behavioral Transactions Matrix:

Consumption Line: Households have a need or want (demand) for products and services within the economy. Consumers are willing to purchase these products using their own income (-Cd) if someone is willing to produce them. Producers fulfil the role of producing what is demanded from Households, and in return generate income (+Cs) from engaging in this activity.

Government Line: Governments and Producers have a similar relationship to that of Households and Producers. The government demands and spends its income on products and services for it's own purposes and public works (-Gd). In turn, producers supply these items as a means for generating their own income (+Gs).

Output Line: Output in the matrix is neither an income nor expenditure. Hence, its single “appearance” does not violate the macro-equilibrium concept. Its existence represents the income/expenditure (assuming income = expenditure) within the economy. Income = output = consumption from households + Government expenditure.

Factor Income Line: This line represents the influence of labour in the economy. Households provide their labour to production firms in order to earn an income (+W.Ns). They must earn this income in order to purchase the goods and services they demand. From a production firm's perspective, labour is required in order for them to produce goods and services which earn them income. The act of hiring this labour force is an expenditure to the production firm (-W.Ns).

Taxes Line: Governments must earn an income in order to provide public goods and services. To “earn” this income, the Government will collect tax income from households which benefit from these services (+Td). Households are taxed in various ways such as on income earned for their labour, which is viewed as an expenditure (-Ts).

Changes in Money Stock Line: It is assumed that over time, households will accumulate excess stocks of money, as their income may exceed the demand for goods and services (this can also be considered savings). If households have an excess amount of money, they can use it to purchase financial assets (-Chg Hh). It is assumed in the simplified transactions matrix that the sole-supplier of these financial assets is the Government. By issuing these assets, the Government can raise income to fund their public works.