Answer to Question #303546 in Finance for Royd

Question

Explain expenditure-changing and expenditure-switching policies. Using the swan diagram, explain how these policies can be used to achieve external and internal balance.

Answer 1

Expenditure switching is a macroeconomic policy that affects the composition of a country's expenditure on foreign and domestic goods. More specifically it is a policy to balance a country's current account by altering the composition of expenditures on foreign and domestic goods.

The use of fiscal policy for external balance, and monetary policy for internal balance, drives the interest rate and budget surplus further away from equilibrium, while the alternative system moves the instruments closer to equilibrium.