Macroeconomic Effects of Fiscal Policy

Abstract

This paper presents a small choice-theoretic intertemporal general equilibrium model. While the model employed is simple, it still allows for government services to yield consumption benefits for individuals and production benefits for individuals and production benefits for firms. It also permits government investment in public capital which has the potential of enlarging society's future production possibilities and of augmenting the rate of return on private capital. The incorporation of distortional taxes on the returns to labor service and investment makes possible a discussion of the positive and normative effects of tax changes. Finally, a slight extension of the model allows for a consideration of open economy issues arising from domestic fiscal policy actions.