We now proceed to the problem of how to finance the business and examine the monetary aspects of the economy. In the previous chapters we have been concerned with the real or physical aspects of an economy; we will now investigate how the purchasing power is provided to the firms in this economy and how money and other means of finance and transaction are circulated among the firms and households.

We assume a general economy in which money may circulate in the markets and be deposited with a bank; the firms may borrow money by issuing bills or bonds–but they can borrow only for one period. When they return the money, interest must be paid to the lender. Where one wants to borrow some amount of money for a longer period (say two periods), he must issue bonds of the necessary amount and reissue them at the beginning of the second period, after having paid back the bonds for the first period at the end of the same period. In this way we simplify bonds of various durations into a single sort of bond for the shortest duration. Also, it is true that bonds issued by different subjects are treated as different commodities because some have good credit, but some others not so much. Thus, in general, bonds yield different amounts of interest. But we shall ignore this problem and simplify the matter by assuming that there prevails a uniform rate of interest in the market of bonds.