SWAN DIAGRAM
Internal balance (IB)
·
trying to maintain a healthy domestic economy
:
PriceStability
Full employment
External
balance (EB) : relates
CA equilibrium
·
to a
export
:
country's
financial
trade and
interactions
with the rest
of
the world
,
measured
in
CA
import
=
Sp
1-line (isoline) : represents combinations
to full
corresponds
·
Downward sloping
increases
that
Sut
employment output.
decrease
a
:
of absorptions and the real exchange rate
real
in
import
=
I to maintain
goods
(Sr
-
)
=
reduces
export decline => decrease
full employment
(absorption A) => can offset
:
it is
the decrease
,
2
At
rate
exchange
) net
~
export
demand
IB : Y
and
for
an
increase in
domestic
:
represents
combinations of
that
a
Upward sloping
·
:
yield
increase
real
in
> CA
import
government
Four quadrants
Above
·
Above
Example
·
:
EB
IB
:
>
into
a
0)
or
EB : CA
(S . 4)
surplus
=> increase
export
to avoid this :
=>
increase
A
(absortion A)
expenditure
,
EB
inflation
"inflation
is
at
surplus
point B
:
inflationary pressures
unemployment
and deficit
in
real
rid
of the CA deficit by
expenditure reducing policies
economy
would suffer
and there
would
be
D
Inflation
deficit
·
B
unemployment
deficit
only using
alone: cut back
·
A
·
domestic expenditure (A) trying to
EB to get
·
surplus
D?
Point C : decrease
IB
absorption
even
more
A
unemployment
Point D :
trying to reduce CA by increasing
pressures
*
Point A
:
0
and decrease
CATO surplus
achieve
*
=
7
Srv
how to achieve point A
Point C
*
moves
A
Sr
If the economy
-
exchange rate
=
Av
rate
exchange
real
the
:
Y > Ye
:
absorptions and
balanced (A (CA
expenditures
demand caused by the drop in net exports
in
Sr
EB-line (isoline)
Y FE
domestic
for there to be
necessary
=
A
cut
=> moves
further away
the real
exchange
rate
(Sr4)
=>
adding
more
inflationary
from IB
back on real domestic absorption and depreciate the
currency
by
appropriate
amounts
Shifts in the curves
·
:
IB-curve :
*
shifts to the right when
-
-
-
:
Expansionary fiscal policy (higher government spending
Monetary easing
(e g . ,
Increase in domestic
.
or
tax
cuts)
Sr
interest rates)
lowering
productivity
7
L
7
L
Shift to the left
*
-
-
-
when :
L
Contractionary fiscal policy (reduced government spending
Monetary tightening
*
Right
increases)
Left
A
A negative supply Shock (e g
.,
labor
shortages
LeftB
Sr
shifts
shift
-
to
the
right
when :
currency appreciation> Sot
to
the
IB
.
:
-
*
tax
(e g . , higher interest rates)
.
EB-curve
or
left when :
currency depreciation> Sr
Right
r
r
-
r
-
A