Costa Junior, Celso JoséGarcía-Cintado, Alejandro2024-06-052024-06-052024-06-01Economic Systems Volume 48, Issue 2, June 2024, 10122510.1016/j.ecosys.2024.101225https://hdl.handle.net/10433/20922Economic policies have been shown to affect the macroeconomy in a different fashion when a sizeable shadow economy is explicitly taken into account. But, in spite of its seemingly high relevance, no intermediate-Macroeconomics textbook posits a discussion on this topic. In this paper, we seek to make a contribution by extending an otherwise conventional IS-MR-PC model along the same lines of the approach used in Blanchard’s highly acclaimed textbook (Blanchard, 2016a) to include an informal sector. We find that this two-sector model is capable of qualitatively reproducing the main basic results obtained in this literature. Therefore, importantly, this work provides a toolkit intended for undergraduate students, practitioners, policymakers, and, in general, nonspecialists on the cost-benefit analysis of economic policies in the presence of a significant underground economy.application/pdfenUndergraduate macroeconomicsNonspecialistsFiscal policyFiscal adjustmentsShadow economyTax evasionjournal articleopen access