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Q. Using the II - XX framework, show using a figure that fiscal policies by themselves cannot bring the economy to both internal and external balances.
Answer: Starting at point 2 monetary policy is revealed as only horizontal movements. This signifies that the economy is able to reach either point 3 internal balance or point 4 external balance in the figure however not both internal and external balances. Only a depreciation of the currency accompanied with an increase in fiscal ease explicitly increasing government expenditures or decreasing taxes will move the economy to both internal and external balances at point 1 in the figure.
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