In 1993 There Was a Severe Drought in Maldavia

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.