This paper, authored by P. Diamond and revised in November 1980, presents a simple general equilibrium model of search in macroeconomics. The model assumes no capital market or money, with prices being free to change but the equilibrium price remaining constant. Individuals optimize their utility, which is linear in consumption and production costs. The production opportunities are modeled as a Poisson process, and the trading process is also modeled as a Poisson process with a probability of finding a trading partner. The model highlights the inefficiency of steady-state rational expectations equilibrium due to the externality created by increased production improving trading opportunities for others. The paper discusses multiple equilibria and the potential for welfare improvement from government intervention. It explores both long-run and short-run stabilization policies, including the optimal path for aggregate demand and the impact of subsidizing production costs. The static model is also presented to simplify the externality and illustrate the design of policy. The paper concludes by emphasizing the importance of realistic models that account for trade frictions and wage rigidities, rather than models with perfect markets.This paper, authored by P. Diamond and revised in November 1980, presents a simple general equilibrium model of search in macroeconomics. The model assumes no capital market or money, with prices being free to change but the equilibrium price remaining constant. Individuals optimize their utility, which is linear in consumption and production costs. The production opportunities are modeled as a Poisson process, and the trading process is also modeled as a Poisson process with a probability of finding a trading partner. The model highlights the inefficiency of steady-state rational expectations equilibrium due to the externality created by increased production improving trading opportunities for others. The paper discusses multiple equilibria and the potential for welfare improvement from government intervention. It explores both long-run and short-run stabilization policies, including the optimal path for aggregate demand and the impact of subsidizing production costs. The static model is also presented to simplify the externality and illustrate the design of policy. The paper concludes by emphasizing the importance of realistic models that account for trade frictions and wage rigidities, rather than models with perfect markets.