Explain the mechanism through which internal and external balance takes place under flexible exchange rate.

Under a flexible exchange rate system, both internal and external balances are achieved through the interaction of market forces, particularly those influencing the exchange rate and adjustments in aggregate demand and supply. Internal balance refers to the achievement of full employment and stable inflation, while external balance refers to the sustainability of a country's external account, primarily its balance of payments. The mechanisms through which these balances are attained in the context of flexible exchange rates can be understood by analyzing the behavior of exchange rates, interest rates, and international trade flows.

### Internal Balance Mechanism

The goal of internal balance is to maintain full employment and price stability within an economy. In a flexible exchange rate system, the adjustment towards internal balance primarily occurs through changes in the exchange rate, which affects both aggregate demand and inflation.

1. Exchange Rate Adjustment:
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