ECON 325 Chapter Notes - Chapter 5: Real Wages, Macroeconomic Model, Production Function

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How unconstrained markets can produce economic outcomes that are socially efficient. Social efficiency proves to be useful in how we use our model to analyze some important macroeconomic issues. How increases in government spending increase aggregate output and crowd out private consumption expenditures and how increases in productivity lead to increases in aggregate output and the standard of living. In this model where the economic outcome in an economy with unconstrained private markets is not socially efficient since government tax collection distorts private decisions. This enables us to explore how the incentive effects of the income tax matter for aggregate economic activity. The optimal size of the government will be studied. The interaction of consumers are firms in a closed economy--a model where a single, that is, this country doesn"t trade with other countries. country has no interaction with the rest of the world are examined in this model. The representative consumer (sells labor and buys goods)

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