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?