Question

Suppose that an exogenous disturbance, such as a change in government policy, leads to a balance of payments deficit and a consequent fall in the exchange rate. Discuss the effects of the new exchange rate level on the balance of payments and the exchange rate.

Answer 1

If fiscal policy refers to the link between government expenditure and tax revenue, and "balance of payments" refers to the current account balance (merchant trade + net services and investment income), then the following is correct: increased government spending while maintaining the same level of revenue.