Nonbank Sectors Revisited

Once the nonbank business and government sectors have decided current period production levels, labor hours, product prices, and the wage rates to be paid next period, their objective functions must be revised and their new constrained optimization problems solved for their effective end-of-period demands for workers for next period and their effective end-of-period demands and supplies of real and financial assets and liabilities. The reason is that the nonbank businesses decided upon their production levels, prices, and wage rates before current interest rates and the actual product demands are established. Consequently, the nonbank business sectors must react to any unanticipated changes in inventories by the end of the period and to market interest rates and exchange rates established during the period. In addition, the government and household sectors formulated plans for current sanitation services and the level of general public services for next period before current prices and wages were announced and before the households learned their current disposable incomes. Now that this new information is available, the governments are free to vary the mix of employees and physical capital with which they will begin next period. The household sectors must now decide their effective current spending on renewable resources and consumption goods and their current saving as well as their asset portfolios for the end of the period.