3.1:
Outside money means the government makes a draft and banknotes for its payments. Inside money (private money) is made by commercial banks or private institutions. Both these ways of money creation and destruction is important to study the complete monetary economy in the real world. However, a hypothetical economy is assumed in which there is a world without any private money, banks, borrowing and interest. This assumption explains why the private bank loan is an important item in the real economic world. It is essential to understand the stock-flow macro-economics rules.

3.2:

A simple model SIM is the starting point for this analysis and built from there. SIM assumes:
A closed economy- No imports/exports
All production undertaken by service providers - no capital equipment and no intermediate costs of production.
Services are instantly provided so unlike manufacturing no inventories exist.
No private banks - government buys services and pays them with the money it printsThe economy is demand-led, i.e. unlimited labour force etc as production responds to demand.

SIM introduces a behavioural matrix explaining each sectors stock of assets and liabilities and how each sector relates to another such that all columns and rows in this matrix sum to zero. It’s players are: households, producers and the government and the transactions are: consumption, government expenditure, output, wages, taxes and change in money stock -Hh +Hh. The balance sheet has money (H) which is an asset to households and a liability to government. Producers are assumed not to hold cash. . The wage bill is the only source of income for household; can be used to pay tax, buy services or buy financial assets. A crucial element of the matrix is total production which is an exception as it is not a transaction between sectors. It is equal to the sum of all spent on goods/services.

3.3
The accounting matrices cannot show how the system works. Therefore, we need to introduce behavioral transactions matrix in order to understand the system as a whole. In the matrix, the vertical columns must sum to zero because the change in the amount of money held must be the same as the households’ income minus their payments. It is similar for government.
There are several mechanisms to insure the supply and demand in the behavioral matrix equal.
1. Neoclassical theory
Higher prices caused by excess demand reduce the excess demand.
2. Rationing theory
Imposing rigid price, this theory believe that the adjustment is done on the short side of the market when supply and demand are not equal.
3. Inventories theory
The theory indicates that there are always enough inventories to absorb the difference between supply and demand.
4. Keynesian quantity adjustment mechanism
Keynesian mechanism base on the premise that production is the flexible element and there are no inventories. The equality between demand and supply is achieved by the quantity adjustment.
Equations of model SIM:
1. YD = W • Ns – Ts
Disposable income equal to wages of households less taxes paid.
2. Td = θ · W · Ns θ< 1
Taxes are deduced from income on the tax rate.
3. Cd = a1 · YD + a2 · Hh-1 0 < a2 < a1 <1
Consumption equals to some proportion of disposable income and some smaller proportion of reserved income.
4. ΔHs = Hs – Hs-1 = Gd – Td
The change in the stock of money of government is the same as the difference between government receipts and outlays in the same period.
5. ΔHn = Hh- Hh-1 = YD – Cd
The accumulated wealth of households equals to disposable income less expenditure.
The following equations illustrate the determination of output and empolyment
6. Y = Cs + Gs
6. Y = W · Nd
7. Nd = Y / W
8. ΔHh = ΔHs
Thus, including the 4 basic equations the SIM model has 11 equations and 11 unknown parameters.

3.4
A numerical example and the standard Keynesian multiplier
This chapter focuses on “the standard Keynesian multiplier”, and the numerical example shows how this model evolves through time, starting with the beginning of the world. This chapter considers whether the multiplier should be interpreted as a logical relationship, occurring within the period, as has been done here, or as a dynamic relationship, occurring over several periods, possibly using trial and error. On the other hand, the drawbacks are also mentioned. First, the view of the multiplier process lacks coherence. Second, the model SIM deals with flows, while not take into account the impact of flows on stocks and the subsequent impact of stocks on flows.


3.5

The model assumes a steady state which means that both flows and stocks change at the same rate and are in a constant relationship to each other .As we omit growth we assume a stationary steady state in which government expenditure equals tax receipts so that no surplus/deficit exists and hence a zero change in the stock of money. It also assumes that consumption must be the same as disposable income and the stock of past accumulated wealth.

3. 6
Another interpretation of the consumption function is offered in terms of a wealth accumulation function

Consumption is disposable income minus the household savings of the period. Households have a defined level of wealth they want. If the target level is below the actual level households will save in order to achieve their target thus consumption will always be below disposable income until the target is reached. Once the target has been passed no more saving will occur and the stationary state is reached.
3.7

The government expenditure is equal to tax receipts in both these two sections. The relationship between income and government expenditure can be descried as
Y*=G/θ
The G/θ ratio means when the income increases and the government expenditure is steady, then the average tax rate will be reduced. This result can be called fiscal stance.
There is two fundamental property of the steady-state such as
(1) As the average tax rate is constant, the aggregate income will increases at the same level when the government expenditure increases.
(2) In a stationary state, there is no savings because of there is no change in financial stocks. So, YD*=C*= G· (1-θ) /θ
This equation expresses the relationship between the disposable income and government expenditure that is the disposable income can be increased as the government increases its expenditure.
Also the equation shows us there is an equal relationship between the consumption with disposable income in the stationary state.

3.8
Stability analysis is important in the dynamic module and coefficient can be used to measure it. In form of equation H = A + BH -1, the B coefficient next to H-1 is always positive. This means the module towards stationary when it is out-of- equilibrium. Therefore, the change of money balances according to time increases in step until it


3.9

The author uses a graphical to illustrate the model of SIM. Especially, the author tries to use two kinds of way to answer the question which are “given the various household consumption parameters and fiscal policy parameters set by government, what is the level of production compatible with aggregate demand?” The short-run answer used different periods of cash money balances to calculate. On the other hand, the long-run answer thought the level of wealth is an endogenous variable.