Interest rates.

Interest rate is a charge for borrowing money and the amount paid for lending money. There are many factors that affect rates of interest such as national savings, AD and others. Central Bank set the base rate first and this rate varies. If an economy is overheating that is when AD increases more quickly that AS, in order to avoid demand pull inflation, Bank will set high base rates. Because if interest rate is high, people tend to save more in order to get benefits from greater dividends. If AD is relatively low, Bank will set low base rates and this will discourage people to save and their average propensity to consume will increase. 

There is a close link between rate of interest and exchange rate. If interest rates are low, that means that people from overseas are less likely to save money in English banks because they are not gaining a lot. As we know exchange rate is determined by supply and demand, therefore when demand for currency goes down, price decreases too, so consequently exchange rate for that particular currency falls.

Balance of payments.

Balance of payments is a record of flow of money coming in and going out of the country. Balance of payments consists of current account, capital account and net errors. Current account tend to play the most significant role and it includes trade in goods, services, transfer payments and income investments. Trade in goods is also known as visible balance, because there is a trade of real physical goods between countries, trade in services is invisible balance because it is a trade in education, information, health services. Investment income shows how much UK residents earn from their dividends, interests from abroad in comparison to income of foreigners from the country. And transfers are transfer of money made by government or individuals. Capital account shows the movement of direct investment such as loans and purchase of financial assets from abroad. Net errors section is aimed to ensure that balance of payments is balanced. 
There might occur current account deficit, which means that money outflow for buying imports are greater the amount of money coming into the country from exports. To reduce current account deficit, government might encourage exports by depreciating the currency or devalue, or discourage imports using different types of import restrictions such as quotas, tariffs, and so on. Capital account deficit occurs when government lent more money than received. To solve this problem government might increase interest rates and so it will get more money from dividends. 


Budget deficit.

Budget deficit arises when government spending exceeds taxation revenue. Why does this occur? Government spends it’s budget on providing public goods and services such as health, education, defense or intervening into free market mechanism in order to prevent market failure and subsidise prices. These expenses are covered by revenue from taxation. That’s why when budget deficit is rising, government might decide to increase rates of taxes or borrow money from other countries which will lead to a capital account surplus or increase rate of interest and so savings will increase and government will have more money in banks. 

Even if in the country there is no budget deficit, there might be some situations when government has to increase its spending for wars, protecting from terrorists and ets. That’s why it is very seldom when country experiences balanced budget that is government spending = tax revenue.

(was writing without notes, and maybe can have mistakes in my explanation)