Bummerland finds itself in a major depression. Wages are rigid-downward in Bummerland, so there is no automatic process by which recovery can take place.

Here are some important facts about Bummerland you'll need:

(1) the marginal propensity to consume is .8 and the "marginal propensity to hold money" (k) is .2; (2) the required reserve ratio against demand deposits is .11; (3) the ratios of currency to demand deposits and of time deposits to demand deposits are .4 and 5.2, respectively; (4) the required reserve ratio for time deposits is .01; (5) the excess reserves to demand deposits ratio is .007; and (6) there is no discount window in Bummerland. The appropriate definition of money in Bummerland is M1.

The expectations theory of interest rate term structure holds.

The Bummerbank and the Treasury have agreed to coordinated policy and have narrowed the choices down to four:

(1) a $100 billion increase in government expenditure, financed by increasing sales of bonds to the public; (2) a $100 billion increase in government expenditure, half of the funds raised from taxing the public and the other half from bond sales to the public; (3) a $100 billion increase in government expenditure, half financed from raising taxes paid by the public, the other half by issuing monetary base; (4) a $100 billion open market operations purchase of government securities.

QUESTIONS:

1. Describe in general terms (with IS,LM diagrams) the effects that each of these policies would have on Bummerland.

2. What is the change in M1 in each of these four cases?

3. Compare (i.e., rank) the effects that each of these policies will have on the level of longterm and shortterm (separately) interest rates, and Y*.