King Marcodini Wantgetitall got a temporary relief (spelled AID) from the stabilization policy implemented two months ago. The IMF and the World Bank were pleased and have resumed significant injections of AID in the economy. But as things stand now, the whole endeavor looks like Sisyphus' work. The rock that was moved up to the top of the hill at severe social costs, starts rolling down again. Inflation has cooled of for a while, but unemployment and poverty are creeping up. To make matters worse, the Holy Father, the Pope, is planning a visit to this deeply catholic nation (gone the days when you had to "go to Rome to see the Pope"; stay at home, he will visit); The opposition is working hard to capitalize on the King's growing misfortune (things were so much simpler during the golden days of Totalitarism: most of these opposition leaders were then enjoying the quietness of the jail, and the King enjoyed tranquility). Ever since he caved in to the advises of the IMF and liberalized his cherished kingdom (IDAMYOU) and its economy, he better understands the fine difference between Peace and Tranquility!!! He still deeply regrets having made the politically suicidal mistake of accepting to hold free and fair elections shortly (that or a suspension in the badly needed US Aid without which he could not keep his army quiet and "communists" on the defensive). With the campaign heating up in the midst of widespread unemployment, skyrocketing inflation and looming popular discontent, will he ever survive this "democratic challenge"? In those golden years of absolute despotism, things were much more manageable: his political economy was basic, instinctive and well proven: monopolize Power and you inherit Wealth; accumulate Wealth and you consolidate Power. But now, with external pressures, he is cornered in the "democratic trap" and painfully recalls the old adage that "only anger and fear will do the job of reason in liberal democracies"(AMEN!!!). He has always been disdainful of economists. Despite his allergy to intellectuals (most of them are quietly languishing in his populous jails), he has no other option than to summon, once more to his office the country's top economist, Prof. Confucius KNOWITALL, a man of unsurpassed erudition, and the country's most authoritative political scientist, Dr Cynicius WISEMOUTH. The King wants to hear what stabilization policy mix they can recommend to defeat inflation and unemployment before they defeat him. Since the Pope was coming soon, he was advised to improve his relations with the local clergy. Consequently, he asked Monsignor PEACEWITHUS Praisethelord to join the policy debate. Monsignor is the most respectable interdisciplinary brain in the country: a voracious reader, he knows Keynes and Marx as well as Jesus, and he understands economics as much as the mystery of the Holy Trinity. 1. Prof. Knowitall was first to take the floor; with his noble manners that has always irritated the King (and paid him s.

1. King Marcodini Wantgetitall got a temporary relief (spelled AID) from the stabilization policy
implemented two months ago. The IMF and the World Bank were pleased and have resumed
significant injections of AID in the economy. But as things stand now, the whole endeavor looks
like Sisyphus' work. The rock that was moved up to the top of the hill at severe social costs,
starts rolling down again. Inflation has cooled of for a while, but unemployment and poverty are
creeping up. To make matters worse, the Holy Father, the Pope, is planning a visit to this deeply
catholic nation (gone the days when you had to "go to Rome to see the Pope"; stay at home, he
will visit); The opposition is working hard to capitalize on the King's growing misfortune (things
were so much simpler during the golden days of Totalitarism: most of these opposition leaders
were then enjoying the quietness of the jail, and the King enjoyed tranquility). Ever since he
caved in to the advises of the IMF and liberalized his cherished kingdom (IDAMYOU) and its
economy, he better understands the fine difference between Peace and Tranquility!!! He still
deeply regrets having made the politically suicidal mistake of accepting to hold free and fair
elections shortly (that or a suspension in the badly needed US Aid without which he could not
keep his army quiet and "communists" on the defensive). With the campaign heating up in the
midst of widespread unemployment, skyrocketing inflation and looming popular discontent, will
he ever survive this "democratic challenge"? In those golden years of absolute despotism, things
were much more manageable: his political economy was basic, instinctive and well proven:
monopolize Power and you inherit Wealth; accumulate Wealth and you consolidate Power. But
now, with external pressures, he is cornered in the "democratic trap" and painfully recalls the old
adage that "only anger and fear will do the job of reason in liberal democracies"(AMEN!!!). He
has always been disdainful of economists. Despite his allergy to intellectuals (most of them are
quietly languishing in his populous jails), he has no other option than to summon, once more to
his office the country's top economist, Prof. Confucius KNOWITALL, a man of unsurpassed
erudition, and the country's most authoritative political scientist, Dr Cynicius WISEMOUTH.
The King wants to hear what stabilization policy mix they can recommend to defeat inflation and
unemployment before they defeat him. Since the Pope was coming soon, he was advised to
improve his relations with the local clergy. Consequently, he asked Monsignor PEACEWITHUS
Praisethelord to join the policy debate. Monsignor is the most respectable interdisciplinary brain
in the country: a voracious reader, he knows Keynes and Marx as well as Jesus, and he
understands economics as much as the mystery of the Holy Trinity. 1. Prof. Knowitall was first
to take the floor; with his noble manners that has always irritated the King (and paid him several
sojourns in jail), and using the IS-LM Keynesian model, he explained how the King can use
fiscal policy to foster growth and reduce unemployment, while keeping the country opened-up
for trade and investment. Assuming the following data from econometric analysis (performed by

2. Computes HEDIMARIUS "the wizard"): . Consumption function: C=a+bYd; a=300, b=0.8 .
Investment function: I=I-R I=300, =1000 . Government spending: G=G; G=850 . Net taxes:
T=T+tY; t=0.25 . Interest rate: R=A-(Ms/P); =0.0002, =0.0001 . Autonomous Demand:
A=a+I+G; . Money supply: Ms=500; . Price level: P=1.00 . Disposable income: YdY-T .
Equilibrium: Y=C+I+G.
a. Show that the equilibrium income is given by Y=m(a+I+G-bT-R). Where m is equal to
m=1/(1-b+bt).