QUESTION:

Bummerland finds itself in a recession caused, as assumed in class, a sticky nominal (money) wage (W) which is too high to clear the labor market.

Bummerland has a Treasury and a "Federal Reserve" (called the Bummerbank).At a meeting of officials of both agencies, various antirecessionary policies are considered.The economic staffs of both agencies are seriously split on issues such as how interestsensitive investment is and how interestsensitive the demand for money is.However, they are in agreement that the marginal propensity to consume (b) is .75 and the marginal propensity to hold cash (k) is .2.Bummerland has banks, but the reserve requirement is 100%, so they don't create money.

Debate has narrowed to four prospective policies.

Your assignment is:

(1) illustrate these policies using IS,LM diagrams;

(2) compare as completely as possible ( if you can't, you must explain what additional information would be required ) the effects of these policies on Y*, r, I*, the real wage, and unemployment.Class format is strongly encouraged.

Here are the four policies:

(1) a $50 billion increase in the money supply by means of open market operations;

(2) a $50 billion increase in the money supply to be introduced by reducing tax collections;

(3) a $50 billion increase in the money supply to be introduced through government spending;

(4) a $50 billion increase in unemployment benefits paid for with a tax increase.