Internal balance refers to :

Question

Accepted Answer

The correct option is 3:
Internal balance in macroeconomic policy refers to the state where a country is simultaneously achieving full employment and price stability (low and stable inflation). Full employment means the economy is operating at its maximum sustainable capacity, utilizing all available labor and capital resources without overstretching them. This is often associated with the potential Gross Domestic Product (GDP) level, where the economy is producing the highest output possible without accelerating inflation. If output is below the full employment level, there is unemployment and recessionary pressure. If output is above it, the economy is overheating, leading to inflationary pressure. Therefore, achieving internal balance means ensuring that aggregate demand is set at a level that maintains output at the full employment level.

The incorrect option is 1:
Equilibrium in balance of payments refers to external balance. External balance is concerned with a country's transactions with the rest of the world, specifically ensuring that the current account balance is manageable or sustainable in the long run, and is separate from domestic issues like employment and inflation.

The incorrect option is 2:
Balanced budget of government refers to fiscal balance, where government expenditures equal its revenues. While a balanced budget is a policy choice, it is neither necessary nor sufficient for achieving internal balance; a country can have full employment with a budget deficit or surplus.

The incorrect option is 4:
Aggregate demand being equal to aggregate supply defines the short-run equilibrium of the economy. While this equilibrium determines the current level of output and price level, it may occur at a point of high unemployment (recessionary gap) or high inflation (inflationary gap). Only when this intersection occurs at the full employment output level is internal balance achieved.