Balance of payments and exchange rate policies usually determine long-run movements of a currency.

Question

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Both balance of payments and exchange rate policies have significant impacts on the demand and supply of a currency in the foreign exchange market, which can affect the long-run movements of a currency. For example, a country with a large current account deficit may experience a depreciation of its currency over the long run, while a country with strict exchange rate controls may limit the appreciation of its currency even with strong economic performance.

Balance of Payments and Exchange Rate Policies Usually Determine Long-Run