Introduction

This chapter presents a model of the growth of a corporate economy with a money market in order to discuss the effects of monetary policy on economic growth. Once money is introduced into the model, income has to be redefined so as to include capital gains due to the change in money prices. In addition, the decision making in the noncorporate sector must be analyzed as to not only how much to save but also how to allocate wealth between money and corporate shares (bonds are still ignored). We will approach these problems in the following manner. Let us take goods as the standard of value, namely, numéraire, and define pm as the price of money in terms of goods. Then, capital gains (measured in terms of goods) obtained from holding money are pm multiplied by the quantity of moneyholdings. We define comprehensive income as income including these capital gains from moneyholdings as well as from wages and returns to share ownership. Similarly, we define comprehensive profit as profit including the capital gains from holding money as well as from the profit defined earlier, namely, sales revenue minus production costs, except the cost of capital.

The first assumption to be made is that the government levies personal income tax and corporate profit tax based on, respectively, the comprehensive income and the comprehensive profit thus defined. Specifically, the amount of tax one has to pay is determined at his comprehensive income (or profit if this is a firm), multiplied by the appropriate tax rate.