There are two basic concepts required to understand the dynamic adjustment of an economy in the present context. First, organized assets markets tend to clear relatively fast as compared to goods markets, and, second, a sudden excess demand for (or supply of) domestic goods tends to give rise to increases (or reductions) in domestic output but only gradually over time. The first concept regards the relative speed at which assets and goods markets clear. Transactions in assets markets, such as portfolio adjustments between money and bonds and between domestic and foreign assets, can be made rapidly and with ease by means of modern communications and through the close integration of national capital markets with the world financial community. Interest rates and exchange rates also tend to adjust rapidly, changing with a disheartening speed in response to new information on economic and noneconomic events. These rapid adjustments insure that assets market equilibrium, in terms of the equality of demand and supply of given stocks of assets, is attained very rapidly, often instantaneously. It is thus appropriate to assume that the money market continuously, or almost continuously, clears. The same cannot generally be said, however, of goods markets.
