In Chapters 1 and 2 we made a number of claims for our model. We pointed out, however, that some of our assumptions restrict the generality of the strong conclusions drawn in subsequent chapters. As the same assumptions will be used to build the two-country model in Part IV, we pause here to examine some of them more closely.

In this chapter we review the principal claims made for the model and assess the extent to which our conclusions depend on restrictive assumptions. In addition, we make way for the relaxation of certain assumptions, one at a time, in the next three chapters. In Chapter 8 we relax the assumption that the demand for money does not depend on income. In Chapter 9 we relax the assumption that expectations are stationary. Finally, in Chapter 10 we relax the assumption that the government's receipts derive entirely from a lump-sum tax (and the assumption that transfers to foreigners offset the interest income earned on foreign bonds).

Claims

Six features of our model command attention at this point. We restate them briefly:

First, the demands for goods and bonds were written to allow for several types of substitution. There was substitution between traded goods, between each traded good and the nontraded good, and between traded and nontraded bonds. Furthermore, the supply side was constructed to encompass competing assumptions about the supply of labor–the “classical” assumption that the wage rate is flexible and the “Keynesian” assumption that the wage rate is rigid.