Question

Consider the possibility that government spending increases the amount of hours to be worked in a given time period, say by providing child care. Assume again that the initial amount of consumption and leisure are still affordable after an increase in spending. How will an increase in government spending affect consumption, hours worked, output and welfare? [Hint: think about how we constructed the bounds on our labor leisure model in terms of hours worked] Suppose instead of domestic government spending we consider remittances sent from abroad (think of this as a model of GNP). What if the remittances increase labor productivity in the long run? Where would you look for evidence in currently collected data for these channels for either the US or Mexican economy? [Both countries are OECD countries.]

Answer 1