Answer to Question #100195 in Macroeconomics for Tiffany

Question

2. Government fiscal policy and international trade seem to be linked. Let’s investigate their relationship.
c. Given the change in the value of the country's currency from part B, how will the price of the country's goods relative to other countries' goods change? What effect will this have on its current account?
Answer:

d. What effect will all this have on the country's capital account, and how will this work to keep the balance of payments equal to zero?
Answer:

Answer 1

Because of changes in relative prices, appreciation of the currency B tends to increase imports and decrease exports, thereby deteriorating the trade balance. The trade balance is the total value of imported goods minus the total value of exported goods.

A change in a country's balance of payments can cause fluctuations in the exchange rate between its currency and foreign currencies. ... The balance of payments does not impact the exchange rate in a fixed-rate system because central banks adjust currency flows to offset the international exchange of funds.

In a floating exchange rate the supply of currency will always equal the demand for currency, and the balance of payments is zero. Therefore if there is a deficit on the current account there will be a surplus on the financial/capital account.

https://www.economicshelp.org/macroeconomics/bop/