(A decrease in tax rates, other things being equal, raises the after-tax interest rate, which has a negative effect on expenditures.) The net effect of a decrease in tax rates is thus ambiguous.
Transfer payments are part of non-labour income, and thus an increase in transfer payments has a negative effect on labour supply.
An increase in interest rate has a negative effect on expenditures, which, other things being equal, has a positive effect on the household savings rate.

FIRM SECTOR
SEQUENTIAL APPROXIMATION TO THE JOINT DECISIONS
The maximization problem for a firm in the theoretical model is fairly complicated, which is partly a result of the large number of decision variables. The five main variables are the firm’s price, production, investment, demand for employment, and wage rate.
The theoretical model of firm behaviour is more difficult to handle empirically than is the theoretical model of household behaviour, and the links from the theory to the econometric specifications are weaker for firms. One of key approximations that were made was to assume that the five decisions of a firm are made sequentially rather than jointly. The sequence starts from the price decision and then goes to the production decision, to the investment and employment decisions, and finally to the wage rate decision.
PRICE AND WAGE EQUATIONS
(10) The price level is a function of the lagged price level, the wage rate inclusive of employer social security costs, the import price deflator, and the demand pressure variable.
(16) The wage rate is a function of the lagged wage rate, the current and lagged values of the price level, the time trend, and the unemployment rate.
Movements of the real wage in the model affect the division of income between profits and wages. A lot of searching was done for both equations, but the results are rather technical.
THE PRODUCTION EQUATION
(11) The specification of the production equation is the point at which the assumption that a firm’s decisions are made sequentially begins to be used. The equation is based on the assumption that the firm sector first sets its price, and then knows what its sales for the current period will be.
No searching was done for the production equation other than to try a few strike dummy variables.
THE INVESTMENT EQUATION
(12) The investment equation is based on the assumption that the production decision has already been made. In the theoretical model, because of costs of changing the capital stock, it may sometimes be optimal for a firm to hold excess capital. If there were no such costs, investment each period would merely be the amount needed to have enough capital to produce the output of the period. In the theoretical model there was no need to postulate explicitly how investment deviates from this amount, but for empirical work this must be done.
EMPLOYMENT AND HOURS EQUATIONS
The employment and hours equations (13, 14, 15) are similar in spirit to the investment equation. They are also based on assumption that the production decision has already been made. Because of adjustment costs, it may sometimes be optimal in the theoretical model for firms to h old excess labour.