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 significant portion of the labour force is cyclically unemployed. The debate is raging as to what 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 is 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 is 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 having studied ECMB06H. Then, all things considered, which of these policy mixes would you recommend the government adopt? Explain why.