In developing our benchmark model in the last three chapters, we described the macroeconomic equilibrium that we were analyzing as a short-run one, because we took the economy's stock of capital and its production technology as given during the period of the analysis. Our reason for holding these variables constant was that they tend to change very slowly over time, relative to the other variables in our model.

But these were not the only variables that we took as given when we built the model. Recall that in describing the determination of equilibrium in domestic asset markets, we introduced several variables that corresponded to financial stocks: the economy's net international creditor position, the domestic government's outstanding debt, and the net worth of the private sector. In the short-run model that we have been studying, these financial stocks were also assumed to be constant. But if the economy's short-run equilibrium results in a surplus or deficit in the current account of the country's balance of payments, its net international creditor position will actually be changing over time. Similarly, if the government runs a deficit in its budget, it will need to issue additional bonds to finance that deficit, and if it runs a surplus it will retire existing bonds. In either case, the outstanding stock of bonds would tend to change. Finally, if the private sector tends to save in excess of the amount that it chooses to devote to investment in physical capital, this will increase its financial wealth.