commodity prices lead to changes in countries ’ terms of trade, which measures the ratio of export to import prices. fluctuations in the terms of trade affect the exchange rate. this dampens the effects of commodity price changes on profitability in business and industry. the exchange rate thus serves as a buffer against changes in the terms of trade. in norway, the petroleum fund mechanism and the fiscal guidelines dampen the effect on the exchange rate of changes in oil prices. we have nevertheless stated previously that we must be prepared for fluctuations in the value of our currency that are more in line with the fluctuations observed in other countries. the exchange rate will vary. the exchange rate may also act as an automatic stabiliser. in periods when economic activity is too high - or there are expectations of overheating - the exchange rate may appreciate, even if norges bank does not change the key rates. similarly, the exchange rate may depreciate if the activity level is too low. in the long term, monetary policy determines the average level of inflation. therefore, over time, monetary policy also has a significant influence on the nominal exchange rate. output is determined by the supply of labour, capital and technology. unemployment will depend in part on labour market policy, structural policy and institutional arrangements in the labour market. industry structure - or the relative size of the internationally exposed and the sheltered sectors - is determined by a combination of two factors. first, industry structure will be affected by developments in production technology in the two sectors. second, industry structure will be affected by how the increase in demand is spread across sectors. the use of petroleum revenues will play a decisive role. monetary policy will not over time affect industry structure. the relationship between inflation and long - term unemployment is often presented as a vertical curve. in other words, we cannot choose a lower level of unemployment by allowing higher inflation. attempts to reduce unemployment by allowing higher inflation can easily lead the economy into a situation with accelerating wage and price inflation. this is not sustainable. the real economic costs of bringing high and increasing inflation under control are considerable. a temporary rise in unemployment will be inevitable. gradually, as the share of the long - term unemployed increases, there is a risk that the relationship between wage growth and unemployment changes. a higher level of unemployment may be the result in the long term. the labour supply will be reduced if unemployment leads to increased flows out of the labour market and into social security schemes. we experienced high inflation in the 1970s and 1980s

currency. a year and a half ago, the government and the storting adopted new guidelines for economic policy. norges bank ’ s mandate states the following : " monetary policy shall be aimed at stability in the norwegian krone ’ s national and international value, contributing to stable expectations concerning exchange rate developments. at the same time, monetary policy shall underpin fiscal policy by contributing to stable developments in output and employment. ” " norges bank ’ s implementation of monetary policy shall, in accordance with the first paragraph, be oriented towards low and stable inflation. the operational target of monetary policy shall be annual consumer price inflation of approximately 2. 5 per cent over time. ” the first paragraph of the mandate sets forth its intentions. the last paragraph specifies what norges bank is required to do. the first sentence in the mandate refers to the value of the krone. stability in for a more detailed discussion, see psg memo prepared by røisland and sveen, norges bank ’ s research department : psg memo no. 7, 2002. see akram, qaisar farooq ( 2000 ) : “ when does the oil price affect the norwegian exchange rate? ” working paper 2000 / 08, norges bank. see akram, qaisar farooq ( 2002 ) : “ ppp in the medium run despite oil shocks : the case of norway. ” working paper 2002 / 04, norges bank. the internal value of the krone implies that inflation must be low and stable. the sentence also states that monetary policy shall be aimed at stability in the external value of the krone. the krone exchange rate fluctuates from day to day, from week to week, and from month to month. we have free international trade and free capital movements. we do not have the instruments for fine - tuning the exchange rate. but when the implementation of monetary policy is oriented towards low and stable inflation, this will contribute to a stable krone exchange rate over time ( see charts ). different real economic developments across countries may nevertheless affect real exchange rates. sweden is an example of this. economic developments in norway ’ s neighbouring country have been fairly weak over the past 30 years. gdp has fallen by 20 per cent in relation to gdp in the euro area. at the same time, the real value of the swedish krona has declined by about 40 per cent against european currencies. sluggish price trends for swedish export goods and the