Under a fixed exchange rate regime, what would be the effect of a balance of payment surplus on the exchange rate?

Question

A. Currency flow surplus.
B. Depreciation
C. Currency flow deficit.
D. Appreciation.
Choose the correct one.

Answer 1

Under a fixed exchange rate regime, a balance of payment surplus typically leads to an appreciation of the currency. This is because a surplus indicates that there is more demand for the currency than supply, as foreign entities are purchasing more goods and services than are being sold abroad, leading to an inflow of the currency.

Therefore, the correct answer is:

D. Appreciation.