A persistent deficit in the net balance of payment (“BOP”) of a country is significant because of its effect on exchange rate movements and its official reserves, depending on the country’s exchange rate regime.

(i) To a country that adopts a free-floating exchange rate regime, market conditions will assist in correcting the deficit. What are the adjustments you may foresee in both the current account and financial account of the country’s BOP under such a regime?

(ii) On the contrary, in a country that adopts a fixed exchange rate regime, trade controls are very common to help correct the deficit. However, economists may oppose to the use of trade control. Why?

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i If a country has a persistent deficit in its balance of payments and adopts a freefloating exchang... View the full answer