Let us assume that you are a policy advisor to your country's Prime Minister. Your country (let us call it Laboria) has considerable current account surpluses and while its inflation is still relatively low, it might soon get to the range where it would appear higher than what your voters seem to be willing to put up with. The country is also a member of a monetary union with a smaller and much less competitive economy (let us call this weaker country Illyria). The other economy has a deep current account deficit and struggles with unemployment too. Somebody has proposed that you should let the currency of the whole monetary union depreciate because this would help Illyria. Explain to the Prime Minister of Laboria what will happen with the economy of Laboria if you try to help Illyria by attempting the depreciation. Can you use fiscal policy to help your country regain simultaneous external and internal balance? What would happen?

Feel free to refer to our discussion of the Swan diagram. If relevant, please feel free to adopt additional assumptions as needed (but mention them explicitly).