A situation where the level of activity in an economy is consistent with a stable rate of inflation. At higher activity levels inflation tends to rise, and at lower levels unemployment is unnecessarily high. Maintaining internal balance is one objective of economic policy. Internal balance is contrasted with external balance, which is a situation where the economy has a balance of payments, on current and capital account combined, which is sustainable, at least in the medium run. Some combination of monetary and fiscal policies should allow both internal and external balance to be maintained.
Internal and External Balance