ECON 4550 Chapter : Chapter 19
Document Summary
Internal balance producing at potential output (at full employment ) and achieving price stability (low inflation). External balance achieved when a current account is: neither so deeply in deficit that the country may be unable to repay its foreign debts, nor so strongly in surplus that foreigners are put in that position. If current account is balanced, then the external balance is balanced: an intertemporal budget constraint limits each country"s spending over time to levels that it can repay (with interest). Impossible for a country to achieve more than two items from the following list: exchange rate stability, monetary policy oriented toward domestic goals, freedom of international capital movements. If a domestic country has a current account surplus in excess of the nonreserve financial account, gold earned from exports flows into the country: raising prices in that country and lowering prices in foreign countries.
