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This paper develops a general model of multimarket disequilibrium and uses it to explain the disequilibrium behavior of prices and interest. Section I summarizes the conventional distinctions between the dynamic loanable-funds and liquidity-preference theories of interest and between the dynamic quantity and expenditure theories of prices. Sections II and III develop the concepts of notional demand and gradual market clearing, which are essential in the conventional analysis. The next three sections develop a choice-theoretic theory of effective demands, starting in Section IV with a generalization of Clower's dual-decision hypothesis to a multimarket context. Section V analyzes the determination of quantity constraints on individual transactions implied by market disequilibriums. Section VI deals with aggregation of the individual effective-demands functions. Finally, Section VII shows how the aggregate effective demands determine the dynamic behavior of the interest rate and price level, and Section VIII shows that the traditional dynamic theories mentioned above are all special cases of the more general effective-demands theory. A priori, the dynamic loanable-funds, liquidity-preference, quantity, and expenditure theories all turn out to be consistent with the structure of exchange in a monetary economy. Which better approximates reality depends upon choice-theoretic behavioral parameters which determine the pattern of response to the constraints imposed by market disequilibriums.
Herschel I. Grossman (Wed,) studied this question.