Consider the following static representative agent model. There is a representative consumer with preferences given by the utility function u(c; l), where c is the consumption good and l is leisure. Moreover, the utility function has the properties that we assumed in class. The representative consumer is endowed with one unit of time and k0 units of capital. Let the production technology be given by y = zf(k; n), where y is output, z is total factor productivity, k is the capital input, and n is the labor input. Assume that f(k; n) has the properties we have assumed in class. Finally, the government purchases g units of the consumption and finances these purchases by imposing a lump-sum tax, denoted t , on consumers.

Determine the equilibrium effects of a change in government purchases on consumption, employment, the real wage, and output. Assume that consumption and leisure are normal goods for the representative consumer. Explain your results.

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The government imposes a lumpsum tax t on consumers The representative consumers optimal choice is t... View the full answer