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

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4. 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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