Abstract
We examine public good expenditure given a stylized business cycle. This cycle exhibits three characteristics, (a) a full employment path, (b) occasional drops from that path followed by reconvergence and (c) sustained underemployment following a large drop. A banking system, modeled using Samuelson's overlapping generations approach, propagates shocks. Two sources of shocks are treated, anticipated future shocks to technology and inherent instability of the banking system, both of which precipitate shocks to demand. We conclude that under gross substitutes the government acting as competitive purchasing agent follows countercyclical policy.
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