Question

In the framework of the Swan model, assume that Australia is currently achieving external balance, but experiencing inflation. Also assume that Australia faces a relatively inelastic IB schedule and a relatively elastic EB schedule.

1. Illustrate the above scenario and mark Australia’s current position on a Swan Diagram as X.
2. Briefly explain how and why an attempt to restore internal balance will disrupt external balance.
3. What automatic mechanisms may help restore internal balance

Answer 1

In the fraeurerk ofSusan medel,asuumng tst iAustralia i cuntly achiesing extnal hlS üAutralia fnce a štalatively inelautic Tntenat Balance schedule and Enternal balance schedule. elastic The simultaneous existonce fntnaand extarnal duequaidibuia, te onother amis wiee be tofesn (Thase ase no ustuictions tacuiffs en -s ubon trads (bThe an absenca fcopital mewment. Diegsamaticsally gin situatio wrill be -EXTERNAL BALANCE (X-M) HNFLATION SURRLUS 11 UNEMPLOYMENT (FULL EMPLONENT) INTERNAL BALANCE DEFICIT Real Expardi'tur O Stanped with amScanner es Cest Rafio (R) Ttenatioral frias/povnes tie Pres

DATE T Ttermal balanca doun fa tindcatefeat louse the and impast the higher muatbe exprdtu te tan fuNT leyeatPesit te f uight ard abat cuve put imp lache lope CÖst 2uatio wieimit enbaut Substiteting oduetien Cuuve and demati a enpeaditure exs sively hih xlati to expaats ard impart sdesig ruadsctlon Belaur aral are to te daft cUne wilg Se, these au te fureARocts statel aloove whick wie důaupt extel halamca and wils seesteru inteunae balamco Te explnditure changg policaican be sblit la) Nauiotien in the intauiut ot afect busine investmant which ffrct cenausmpSpedg Variof'an in fnliestseot eausmovement (b) im hoat toxm capital aaal Con h Cs SatedBlam of Pamnt situation inme CamScanner

DATE JD SURPLUS RECESSION DEACIT INFLATION ISURPLUS INFLATION Interest Rata (Morelay Pely Entesnal Balamc Cue Me Responive to menctoay Pelicy mau Responfve o Inteseral Belaner Curve CS Seenned ith CamScanner DEF/CIT Notional Budlgt (fiscal Paery)