The closed economy of North Korea is experiencing a debate about the strength and

appropriateness of certain government policies. Significant debate is occurring among different

groups within the country. The economy is presently in a short-run equilibrium in which a

a significant portion of the labor force is cyclically unemployed. The debate is raging as to what

the mix of government policies would be most effective at meeting the governments' short-run and

long-run economic objectives.

Expert #1

has proposed that the government should use changes in government spending on

goods and services to achieve the unemployment goal.

Expert #2

counters that changes in taxes are better as long as they are accompanied by an equal

and opposite change in the money supply (that is, if taxes rise by $1, then the government also

reduce the money supply by $1, and vice versa).

a) This part focuses on the governments two short-run objectives of ensuring unemployment is

not too high and keeping the size of government saving from becoming too small. Which of

these policy mixes are most effective at meeting the governments' short-run goal? Explain,

using words and a single AS/AD diagram and a single IS/LM diagram, the degree of

effectiveness of each of the policy mixes.

b) This part focuses on the governments two long-run objectives of keeping inflation form

getting too high and ensuring investment is not too low in the longer term. Which of these

policy mixes are most effective at meeting the governments' long-run goals? Explain, using

words and your single AS/AD diagram and single IS/LM diagram (from part A), the

effectiveness of each of the policy mixes.

c) Suppose you are an expert in macroeconomics. Then, all things considered, which of

these policy mixes would you recommend the government adopt? Explain why.