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[solution] » (b) Assume an economy is in external balance but not internal balance. Internally, it is experien

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(b) Assume an economy is in external balance but not internal balance. Internally, it is experiencing unemployment. Also assume that the IB schedule is steeper than the EB schedule. Explain how and why an attempt to restore internal balance will disrupt external balance and what policy would be used to restore internal balance. (10 marks)

(c) Critically comment on the following statement.

?The external balance schedule is upward sloping as an increase in the real exchange rate causes an increase in the level of government expenditure.? (5 marks)


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