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*
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.
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,