Question

Does exchange rate policy have any effect on its interpretation of BOP? Explain.

Answer 1

Interest rates affect both consumer spending basically the imports for an country and it also has an impact on the currency exchange rates i.e. which effects the prices of imports/exports. The impact of interest rates of current account depends on situations.

Example government increases interest rates then people would be savings more in order to earn more interest as proposed by government and less people will be borrowing i.e consumers spending less leading to a better Current account deficit. And higher interest does help to curb inflation making exports more competitive and improving country's current account.

Current account deficits =A Countries trade where the value of goods & services imports are more than the exports.

Balance of Payments = record of all economic transactions between a country and rest of the world