This document discusses the role of money in the economy and the relationship between capital, financial, and money markets. It covers topics such as investment and savings, the determination of interest rates in commodity and fiat money systems, how financial prices connect money and capital markets through bond markets, and the relationship between return on capital, price of capital, and interest rates. It also discusses the simultaneous equilibrium between the capital, money, and financial markets.

1. Role of money in the economy
[
Capital, return and interest
Real economy
Self- sufficient household (economy) – production and consumption
Investment and savings
Investment, production, savings and return
Investment, production, savings, return and the real (natural) interest rate
1

2. The determination of interest in a capital market
Supply of capital
(Savings)
2
Return
Qc
Demand for capital
(Investment)
r2
r1

3. The determination of interest in the gold market
Determination of interest rate in a commodity money system
3
Interest
Qm
Demand for gold money
i2
i1
Supply of gold money

4. Determination of interest in a fiat money system
4
Interest
Qm
Demand for fiat money
i2
i1
Supply of fiat money without a
central bank

5. The determination of interest in the fiat money market
Determination of interest rate in a fiat money system with-out and with a central
bank
5
Interest
Qm
Demand for fiat money
i2
i1
Supply of fiat money with a central bank

6. Financial prices connect money and real capital
markets: The determination of the price of a bond market
Demand of bonds
(Save - money exchanged for bonds)
6
1/P
Qb
Supply of bonds
(Investment – bonds exchanged for money
1/P*
1/P

7. Relation between markets and the: return on capital, price of capital and
money interest rate
• MV=PY where M= money stock; V= velocity of money; P=money as medium of account
and Y= stock of products (production)
and M=1/v[PY] where 1/v=k and k = demand for money
and MV/P = Y where MV/P is use of real money use and Y is Real Income = Real Production
• i = R = r/P where i=real rate of money interest; r=real return = [P*- P] and P= price of
asset (good/bond) [ix100 = r/Px100 to make it possible to relate interest value and return
index – return is relative value – depends on the price of an asset].
• Arbitration, speculation and market equilibrium
7

8. Simultaneous equilibrium in the capital, financial and money market
Capital market Money market Financial market
8
I S
Sb [demand
for money]
Lm Ms
QmQb
i=R[=r/p]
↓
Qc
1/p [= i/r]
Market for
maize seed
Market for
money
Market for
bonds
↓ ↓
Db [supply of
money]
i
i*
i[=r/p]