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Chapter 5

Chapter 5 Notes

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Western University
Economics 2152A/B
Philip King

Chapter 5 Model Economy  Closed economy (no foreign sector)  One-period economy (borrowing and lending is not possible)  Ns = Nd at an equilibrium wage rate w* and equilibrium labour amount N* Government  G: Government expenditure  T: Lump sum tax o Government determines how much of the consumption good it wants and takes from the production (Y) o Exogenous (determined outside the model); amount is not determined by the consumer  As opposed to endogenous (determined by the model)  A variable that appears on the x or y axis is endogenous. Otherwise, exogenous.  Government’s budget constraint: G = T o Surplus or deficit is not possible because this is a one-period economy. Competitive Equilibrium  All agents are price takers (no one is large enough to affect the market price) o The only price is the real wage rate. Both firms and consumers face this price, and clears the labour market  To find the equation,
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