5. Starting from a situation with no government spending and no taxes, the government introduces a foreign

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5. Starting from a situation with no government spending and no taxes, the government introduces a foreign aid program (in which domestically produced goods are shipped abroad) and pays for it with a temporary 10% tax on current wages. Future wages are untaxed. What effects will the temporary wage tax have on labor supply? Use the classical IS-LM model to find the effects of the fiscal change on output, employment, the (before-tax) real wage, the real interest rate, and the price level.

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Macroeconomics

ISBN: 126148

6th Edition

Authors: Andrew B. Abel, Ben S. Bernanke, Dean Croushore

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