The Endogenization of State Expenditure and Taxation in A Simple Keynesian Model

Abstract

The Keynesian income-expenditure model is, on an introductory level, a most instructive model in macroeconomics. It is widely used in textbooks — see, e.g., Samuelson (1980), Lipsey, Steiner and Purvis (1987) — to give a feeling for the complexity and internal coherence of an economy, and to show in a simple way how decentralized decision making can lead to results (unemployment) that are not aimed at. For expositional reasons we link up with this tradition and use the Keynesian model as a starting point for our analysis. This will enable us to focus attention on the modelling of public sector behaviour, and on its consequences, without being distracted by the present controversies on the proper formulation of the model that best represents the functioning of the economy.