Saturday, August 22, 2009

Price Stability and Balance of Payments

There appears to be no conflict between the objectives of price stability and balance of payments in country. Monetary policy aims at controlling inflation to discourage imports and encourage exports and thus it helps in attaining balances of payments equilibrium. However if the government tries to remove unemployment and allows some inflation with in the economy, there appears a conflict between these two objectives. For a rise in the price level will discourage exports and encourage imports, thereby leading to disequilibrium in the balance of payments. But this may not happen if prices also rise by the same rate in other countries of the world.


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