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