  This paper develops a new model of business cycles. The model is economical
in that it is solved with an aggregate demand-aggregate supply diagram, and the
effects of shocks and policies are obtained by comparative statics. The model
builds on two unconventional assumptions. First, producers and consumers meet
through a matching function. Thus, the model features unemployment, which
fluctuates in response to aggregate demand and supply shocks. Second, wealth
enters the utility function, so the model allows for permanent zero-lower-bound
episodes. In the model, the optimal monetary policy is to set the interest rate
at the level that eliminates the unemployment gap. This optimal interest rate
is computed from the prevailing unemployment gap and monetary multiplier (the
effect of the nominal interest rate on the unemployment rate). If the
unemployment gap is exceedingly large, monetary policy cannot eliminate it
before reaching the zero lower bound, but a wealth tax can.
