The paper develops an alternative to the standard IS-LM framework. There are two asset markets and three prices—the prices of real assets, financial assets, and output. Costs of adjustment and information prevent output prices and output from adjusting instantaneously. Both the size of deficits and the method of financing affect output and prices. Some principal implications are derived. Several of these are also demonstrated, using a graph to show the interaction of asset markets, output markets, and the financing of the budget deficit. Some main implications of standard analysis are rejected. The basis for several "monetarist" conclusions is shown.

Friedman's many contributions to monetary theory did much to renew interest in monetary theory and policy. Heretofore, there has been no statement of the underlying theory that guides his work and generates policy implications. Two recent papers attempt to fill the gap. We have four main criticisms of Friedman's theory. We regard as most important that the theories do not generate principal monetarist conclusions about the role of money and the variability of monetary policy. Friedman's static frameworks leave the relative potency of fiscal and monetary policies dependent on the slopes of the IS and LM curve. This is unsatisfactory.

Few conclusions about economic events have been repeated as frequently or have had as much influence on economists' attitudes toward monetary policy as the assertion that the monetary system of the thirties was "caught in a liquidity trap." Empirical studies of the public's demand for money and the banks' demand for earning assets seemed to support the assertion about a trap and the closely related conclusion that monetary policy had no effect on output, employment, and prices during at least some part of the thirties.1 Conclusions about the occurrence of a trap and the ineffectiveness of monetary policy were reinforced by central bankers' statements that likened monetary policy to "pushing on a string."2 Taken together the empirical evidence and the central bankers' interpretations convinced many economists that some form of a trap had existed (Keynes 1936 p. 207; Fellner, 1948, pp. 81-83, 91-93; Villard, 1948, pp. 324 334 345- Shaw, 1950, pp. 283-85)

In his recent contribution to the theory and empirical analysis of the demand for money, Gregory Chow attempted to reconcile the short- and long-run behavior of the demand for money by "introducing a mechanism for the adjustment of actual money stock to desired stock. . ." (Chow, 1966, p. 111). In this brief comment, we will argue that his formulation of the adjustment equation contains implications that make it difficult to accept and that his empirical evidence does not distinguish the "relative importance of current income as compared with wealth or permanent income" (Chow, 1966, p. Ill), as he claims. Further, we show that when income and prices are not combined in a single variable, nominal income, his more important conclusions about the effect of current income on the demand for money are reversed.

Stephen M. Goldfeld, Allan H. Meltzer, Session Topic: The Flow of Funds and Interest Rates-I: U.S. Financial Models: Discussion, The Journal of Finance, Vol. 29, No. 2, Papers and Proceedings of the Thirty-Second Annual Meeting of the American Finance Association, New York, New York, December 28-30, 1973 (May, 1974), pp. 358-363

THE PROBLEM of selecting a portfolio can be divided into two components: (1) the analysis of individual securities and (2) the selection of a portfolio or group of securities based on the previous analysis. Up to now, the majority of writers have focused on the first part of the problem and have developed several, well-accepted methods of analysis.1 Little attention has been paid to the second phase of the problem. It is to this second part of the portfolio selection process that this paper is principally devoted.

[In a general equilibrium model of a labor economy, the size of government, measured by the share of income redistributed, is determined by majority rule. Voters rationally anticipate the disincentive effects of taxation on the labor-leisure choices of their fellow citizens and take the effect into account when voting. The share of earned income redistributed depends on the voting rule and on the distribution of productivity in the economy. Under majority rule, the equilibrium tax share balances the budget and pays for the voters' choices. The principal reasons for increased size of government implied by the model are extensions of the franchise that change the position of the decisive voter in the income distribution and changes in relative productivity. An increase in mean income relative to the income of the decisive voter increases the size of government.]

In a general equilibrium model of a labor economy, the size of government, measured by the share of income redistributed, is determined by majority rule. Voters rationally anticipate the disincentive effects of taxation on the labor-leisure choices of their fellow citizens and take the effect into account when voting. The share of earned income redistributed depends on the voting rule and on the distribution of productivity in the economy. Under majority rule, the equilibrium tax share balances the budget and pays for the voters' choices. The principal reasons for increased size of government implied by the model are extensions of the franchise that change the position of the decisive voter in the income distribution and changes in relative productivity. An increase in mean income relative to the income of the decisive voter increases the size of government.