In 1993 There Was a Severe Drought in Maldavia

question 70

Essay

In 1993 there was a severe drought in Maldavia. As a result of the drought, approximately two-thirds of the country's agricultural crops were destroyed. Using an AS/AD diagram, indicate what effect this drought would have on the overall price level and the equilibrium level of output. The Maldavian government is considering a number of policies to counter the effects of the drought on the economy. For each of the following policies, draw a graph that indicates the effects of the drought and then indicate how the policy would affect the overall price level and level of equilibrium aggregate output in Maldavia.
(a) The government is considering reducing net taxes.
(b) The monetary authority in Maldavia is considering a one-time increase in the money supply.
(c) The government is considering reducing public investment in agriculture and not spending that money on any other projects.

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Definitions:

Performance

In contract law, it refers to the act of doing what is required by a contract.

Novation

The act of replacing an original party in a contract with a new party, with the consent of all involved, effectively creating a new contract.

Previous Valid Obligation

A duty or commitment that has been legally recognized and must be fulfilled as previously agreed or contracted.

Novation

The act of replacing an old obligation with a new one, thereby extinguishing the original obligation.