Interrelations Among Macroeconomic Sectors And The Flow Of Funds

Although the four macroeconomic sectors have thus far been treated separately, activities in each sector affect, and are affected by, activities in the other sectors. For example, as noted in Chapter 1, a rise in private consumption (part of the real sector) affects the balance of payments (since part of consumption involves imports), the fiscal sector (since most consumption goods are subject to tax), and the monetary sector (since bank deposits of some households may decline and, if automobiles or appliances are involved, consumer loans may increase). Likewise, a rise in income tax rates, which originates in the fiscal sector, will likely affect consumption and possibly investment (real sector), the balance of payments (imports and government borrowing from abroad may both decline), and the monetary accounts (net credit to government will likely decrease). An exchange rate depreciation, which should reduce imports and ultimately raise exports (external sector), will affect the real sector (a rise in net exports), the fiscal sector (higher import duties, measured in domestic currency, in the short run, and possibly higher profits taxes from exporters over time), and the monetary sector (changes in bank deposits and lending). A change in interest rates will affect lending and perhaps saving (monetary sector), investment and consumption (real sector), the government budget (interest payments and possibly tax revenues), and possibly net external capital flows (external sector).