Stock-Flow consistent model

Hey kiddo, have you ever played with water in a bucket? When you open the faucet, the water flows into the bucket, and when you close it, the flow stops. Similarly, in a stock-flow consistent (SFC) model, we keep track of not only the water flowing in and out but also the amount of water in the bucket at any given time.

Now imagine if we replace the water with money and the bucket with an economy. So, a stock refers to the amount of money that an economy holds at any given time, and flow refers to the quantity of money moving in and out of the economy. In short, an SFC model tells us how the money (flow) changes the size of the economy (stock) over time.

Let's take an example: Assume the economy has two sectors, household, and firms. Households earn money by providing labor, while firms earn money by selling goods and services to the households. The households save some of their income in banks, and then the banks lend this money to firms to invest. This cycle continues, creating a flow of money.

But, the thing with this cycle is that it not only affects the flow but also alters the size of the economy's money stock. For example, households might save too much money, causing a decrease in demand for goods and services, which can lead to a decrease in production and employment. In turn, the decrease in employment lowers households' income and demand even further, causing a vicious cycle.

Therefore, an SFC model helps us to understand how different sectors of the economy interact with each other and how changes in one sector can impact the entire economy over time. It is like playing with water in a bucket, where we keep track of not only the flow of water but also the amount of water in the bucket at any given time.