Question

Draw the II-XX diagram, indicating the “Four Zones of Economic Discomfort” given in
Figure 19-2 of your textbook. What do the XX and II schedules represent? Explain why XX
is upward sloping and II is downward sloping.

Answer 1

Ans) This four zones of economic discomfort is also known as Swan diagram, it shows the disequilibrium in balance of payment of an economy. Also it shows the imbalance between external and internal balance. External balance which are affected by external forces i,.e by international market while internal balance are which are get affected by the demand and supply in the economy itself this curve also represents various combination of exchange rates and real interest expenses which lead to internal balance. In this diagram XX represents internal balance and II represents external balance. XX is upward sloping showing higher the output higher will be the inflation in the economy as output is produced above natural rate of output and above natural rate inflation will occur because of higher demand and supply of the product in the economy. Whereas II is downward sloping showing lower unemployment with higher output and vice- versa.

As shown in figure the XX is internal balance curve while II is external balance curve. All four zones of economic discomfort are shown in this diagram.