This allows us to study the macroeconomic effects of traditional fiscal policy in an explicit forward-looking framework. The model that is used is described by the following equations:

YD = aq pi/ + G, a > 0, 0 < < 1, (4.35)

= a [YD — 17], a > 0, (4.36)

M/P = kY —1Rs, k > 0, 1 > 0, (4.37)

Rs = RL — (1/RL):RL, (4.38)

4 + = Rs , q 7r = ao ai Y, where YD is real spending on goods and services, q is Tobin's average q, Y is the level of real production (and income), G is an index of fiscal policy, Y [. dY /dt] is the change in output, Rs is the short rate of interest, RL is the rate of interest on consols

(the long rate), M is the nominal money supply, and P is the fixed price level.