Suppose an economy that is initially at full employment faces a substantial fall in exports.
a. Discuss (with the aid of aggregate output market and money market diagrams) the short run effect of a substantial decrease in exports on output, general price level and interest rate.
b. With the aid of a Phillips-curve diagram, discuss what happens to inflation and unemployment in the short run.
c. Explain two arguments against the use of active stabilization policies to minimize economic fluctuations due to the short-term demand or supply shocks.