Reference no: EM131523861

Internal and external balance

Question 1

(i) An economy is in internal balance but have a Current Account deficit. Its IB schedule is steeper than the EB schedule. Explain in what situation you would be able to restore external balance without disrupting internal balance.

(ii) An economy is in external balance but have an unemployment situation. Its IB schedule is steeper than the EB schedule. Explain in what situation you would be able to restore internal balance without disrupting external balance.

(iii) Explain why the external balance is upward sloping.

Question 2

(i) An economy is in internal balance but have a Current Account deficit. Its IB schedule is steeper than the EB schedule. Explain in what situation you would be able to restore external balance without disrupting internal balance.

(ii) An economy is in external balance but have an unemployment situation. Its IB schedule is steeper than the EB schedule. Explain in what situation you would be able to restore internal balance without disrupting external balance.

(iii) According to the Swan model, the order in which policy goals are pursued will determine whether policy assignment is stabilising or destabilising. Do you agree?

Question 3

(a) Assume that Singapore is currently achieving internal balance, but experiencing a trade surplus. Also assume that Singapore faces a relatively elastic IB schedule and a relative inelastic EB schedule. Explain how and why an attempt to restore external balance will disrupt internal balanceand how internal balance would be restored.

(b) Assume that Malaysia is currently achieving internal balance, but experiencing a trade deficit. Also assume that Malaysia faces a relatively inelastic IB schedule and a relatively elastic EB schedule. Explain how and why an attempt to restore external balance will disrupt internal balance and how internal balance would be restored.

IS-LM-BP

Question 1

Using the ISLMBP model, explain the following situation:

(a) Explain the effects that a decrease in taxes has for the domestic economy with zero capital mobility under a fixed and a flexible exchange rate system.

(b) Explain the effects that an increase in money supply has for the domestic economy with perfect capital mobility under a fixed and a flexible exchange rate system.

Question 2

Using the ISLMBP model, explain the following situation:

(i) Assume zero capital mobility; explain the effects that an increase in government expenditure has for the domestic economy under a fixed and a flexible exchange rate system.

(ii) Assume perfect capital mobility; explain the effects that an increase in money supply has for the domestic economy under a fixed and a flexible exchange rate system.

Question 3

(i) Assume that Singapore is currently achieving internal balance, but experiencing a trade surplus. Also assume that Singapore faces a relatively elastic IB schedule and a relative inelastic EB schedule. Explain how and why an attempt to restore external balance will disrupt internal balanceand how internal balance would be restored.

Assume that Malaysia is currently achieving internal balance, but experiencing a trade deficit. Also assume that Malaysia faces a relatively inelastic IB schedule and a relatively elastic EB schedule. Explain how and why an attempt to restore external balance will disrupt internal balance and how internal balance would be restored.