Explain why governments tend to view internal balance as being more important than external balance.

Question

Quizplus · Accepted Answer

The Answer is Governments now tend to use monetary and fiscal policy to focus on a country's internal balance. Internal balance refers to the levels of unemployment and inflation that fit the preferences of the citizens of various economies. For most countries, the focus of fiscal and/or monetary policy is on managing the growth rate of real GDP and the price level. In many cases, this focus on internal balance comes at the expense of external balance considerations. In effect, the exchange rate and the current account balance become secondary variables as countries attempt to manage the domestic economy and the exchange rate and current account balance adjust to these policies. In many cases, this approach seems sensible as the exchange rate and the current account are important. However, the state of the domestic economy is usually considered to be far more important. This focus on internal balance is not without a cost. Policies designed to achieve a desired internal balance may have large consequences for a country's external balance. Governments may not like the results of fiscal and/or monetary policy changes on the country's external balance, but in many cases, they are willing to accept these consequences as the price of maintaining internal balance.

Explain Why Governments Tend to View Internal Balance as Being