In the first demand-inflation model, we assumed that government and households were competing for a fixed amount of gross national product, and we concluded that unless tax rates were raised (or households voluntarily increased their saving), the government could not permanently increase its relative consumption through borrowing a constant money amount. But inflationary results may come from other competition than between households and government. When any two or more sectors, or even constituents of a single sector, compete for more gnp than is available at current prices, the results will be inflationary. The present model will introduce no new principles not covered in the first model, but will apply them to a competition between households for personal consumption and producers for investment.
Let us suppose that in period zero gnp is $500d, consisting of $400b of personal consumption and $100c of domestic investment by business. The accounting entry (which represents an equilibrium position) is as follows:
|1. Payments to factors of production||500a||500|
|2. Domestic investment:|
Since cash receipts of business are $400b (from sales of consumer goods) and its expenditures $500a (for factor payments), the producing sector must each period borrow $100e from householdsf. It does so by issuing corporate securities, and the flow-of-funds entry for (equilibrium) period