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Explain how changes in the exchange rate can affect the balance of payments and
how this in turn can affect the level of domestic economic activity.

The exchange rate is the rate at which one currency can be exchanged for another
currency.

A falling exchange rate increases exports as UK…

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short run and achieve its inflation target.

Interest rates are the cost of borrowing money, or the benefit of lending or saving
money expressed as a percentage. The Bank of England, the Monetary Policy
Committee set the interest rate in order to achieve the inflation target of 2%.
When interest…

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