This thesis analyses the effects of certain real shocks on the nominal and real exchange rates. The first chapter analyses the impact and long run effects of an open market operation when domestic and foreign assets are imperfect substitutes. The nominal exchange rate overshoots its long run value. The real exchange rate depreciates on impact but appreciates in the long run. The second chapter analyses the effects of monetary disinflation when the government budget constraint is introduced. It is shown that when a cut in the rate of monetary growth is accompanied by a cut in government expenditure we could have a jump depreciation of the real exchange rate. But the costs in terms of output foregone are identical to those in the literature. The third chapter shows that under plausible assumptions an expansionary balanced budget fiscal policy leads to current account surpluses rather than deficits. The fourth (and final) chapter exmaines empirically the effects of a foreign real interest shock on the real exchange rate for the UK.