Suppose the government proposes austerity measures that induce a
larger reduction in public goods. We are going to use our standard
one-period model to address the effects of this shock. Let a
representative consumer maximize utility which is a function of
consumption, c, and leisure, l. The consumer earns a wage rate, w,
receives profits, π, and pays a lump sum tax T. They are endowed
with a maximum of h units of time. A representative firm maximizes
profits by...