Answer to Question #222305 in Macroeconomics for Little

Question

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

Answer 1

Low exchange rate means the domestic currency value is low. This will make the country's imports more expensive and its exports less expensive to foreign markets. The lower exchange rate will then improve the balance of payment.