2. Exchange rate and BOP relationship. What happens in the case: Current account

Question

2. Exchange rate and BOP relationship. What happens in the case: Current account deficit of $500 billion, financial account surplus of $300 billions. Ignoring statistical discrepancy, Show in words and a graph what will happen in the following two cases?

(a) The exchange rate system if flexible where market supply and demand determines exchange rate.

(b) The system is fixed exchange rate system. What should the Central Bank do to restore the balance of payment?

i need full Explanation and graphs

Explanation / Answer

(a) Flexible (or floating) exchange rates

Under a flexible or floating exchange rate the value of a country

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