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 levelon the balance of payments and the exchange rate.

Answer 1

This equates value of a currency with balance of trade. For instance, focusing on DXY, US Dollar Index, about 50 years before, link tends to be almost non-existent. Actually, there is no link. Rather, dollar's value tends to be strongly connected with the amount or degree of fiscal policy initiated by administration.