1. Why do nations need policies to adjust balance-of-payments disequilibria?

Which are the most

important objectives of nations?

A disequilibrium in the balance of payments whether a deficit or surplus has important implications
for a country. A deficit in the combined current and capital accounts is regarded as undesirable for
the country. This is because such a deficit must be covered by borrowing from abroad or attracting
foreign exchange or capital from abroad. This may require paying high interest rates.

The most important economic goals or objectives of nations are

(1) internal balance

(2) external balance,

(3) a reasonable rate of growth

(4) an equitable distribution of income

(5) adequate protection of the environment

2. What policies can nations utilize to achieve their objectives? How do these policies operate to
achieve the intended objectives?

To achieve these objectives, nations have the following policy instruments at their disposal:

(1) expenditure-changing

(2) expenditure switching policies

(3) direct controls.

Expenditure-changing policies include both fiscal and monetary policies

_Fiscal policy refers to changes in government expenditures, taxes, or both.

_ Monetary policy involves a change in the nation’s money supply that affects domestic interest
rates.

Expenditure-switching policies refer to changes in the exchange rate(Devaluation or revaluation)

_A devaluation switches expenditures from foreign to domestic commodities and can be used to
correct a deficit in the nation’s balance of payments.

_ A revaluation switches expenditures from domestic to foreign products and can be used to correct
a surplus in the nation’s balance of payments.

3. What is meant by the principle of effective market classification? Why is it crucial that nations
follow this principle?

Policies should be paired with objectives on which they have the most influence: such is the main
idea of principle of effective market classification.

Because each policy affects both internal and external balance of the country thus it its critical each
policy be paired with and used for the objective toward which it is most effective.