Bummerland finds itself in a major depression.Wages are rigid-downward in Bummerland, so there is no automatic process by which the economy can recovery on its own.

Here are some important facts about Bummerland you'll need: (1)the marginal propensity to consume is .75 and the "marginal propensity to hold money" (k) is .2; (2)the required reserve ratio against demand deposits is .10. The appropriate definition of money in Bummerland is M1, defined in Bummerland as currency + demand deposits (Bummerland's bank deposits consist only of demand deposits).

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

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?