Answer to Question #221594 in Economics for nana k

Question

2. 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 we assume that an external violation is such. For example. As the change in government policy led to a deficit in the balance of payments and, as a result, to a depreciation of the exchange rate, this will lead to the fact that the balance of payments will be even more deficit, since a higher exchange rate was laid during its planning. The exchange rate will gradually increase, as the government, together with the Central Bank, will implement a policy of increasing the exchange rate. But if such a policy is not pursued. then the rate will gradually decline.