Real shocks lead to exchange rate fluctuations with lasting economic impacts.
The article examines how real shocks affect exchange rates. It shows that when there are changes in the money supply or government spending, exchange rates can fluctuate in the short and long term. A decrease in the rate of money growth can lead to a sudden drop in the exchange rate. However, an increase in government spending can actually result in a surplus in the country's current account. Additionally, foreign interest rate changes can impact a country's exchange rate.