ABSTRACT
When a country faces an imbalance in its international payments position, it can respond in four possible ways or combinations thereof. First, it can finance the imbalance. A country in surplus can accumulate reserves or extend credit; a country in deficit can use reserves or borrow. Second, a country can alter the course of its domestic economy in an effort to adjust the imbalance indirectly. Third, a country can seek to suppress its external imbalance directly by adopting selective measures aimed at particular classes of international transactions. Fourth, a country can seek to adjust the imbalance directly by changing its exchange rate. The international monetary capabilities of individual countries are functions of both their economic and political power. Some countries have little or no international monetary power. Thus the power of a country to create its own money depends both on the economic attractiveness of such balances to others.
