CHAPTER 3 - A Neoclassical Model of Fiscal Policy, Employment, and Capital Accumulation

Abstract

This chapter presents a neoclassical model of fiscal policy, employment, and capital accumulation. It describes the effects of government fiscal policy on equilibrium levels of market employment of factors of production. A general tax on market activity, for example, will result in a decrease in market activity in favor of nonmarket activity. A tax on the employment of a specific factor of production, for example labor, will result in a reduction in the employment of that factor. The basic framework of the theoretical model discussed in the chapter—most aspects of which are found in the standard literature on neoclassical growth, saving, national debt, labor supply, and taxation of the past 20 years— is a Solow-type one-sector growth model in which population grows at a constant, exogenously given rate, and in which the output is produced by labor and capital according to a neoclassical production function.