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 labour 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.