The analysis will be conducted within an IS-LM model augmen- ted by
the dynamics of money wages, private capital and public debt. A
macroeconomic shock induces an extended process of adjustment that
is characterized by unemployment. This in turn requires a dynamic
path of monetary and fiscal policy: As a response to the shock, the
central bank continuouslyadapts the quantity of money so as to keep
up full employment all the time. And the government continuously
accommodates its purchases of goods and services. Can this be
sustained? Or will public debt tend to explode, thereby driving the
stock of capial down to zero?
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