1. Explain the effects of the severe winter results in the sharp fall in agricultural; harvest on price level , real GDP and interest rate. Under which exchange rate system, floating or fixed, will economy be more stable? Use AD/AS and IS/LM diagrams to show the answers. Describe.
2. Assume that two administrations, one Democratic and other Republican, both utilize fiscal and monetary policies to keep output at potential level, but that Democratic administration increases more taxes and maintain the larger money supply than Republican administration. (Suppose that level of government spending is same under both administrations).
a.) On the Single diagram, illustrate how IS and LM curves of the two administrations vary
b.) Find in which administration follow variables will be higher ; investment spending, consumer spending, government saving and private saving and net exports. Describe the answers.