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

Question

A)Currency flow surplus
B) Depreciation
C) Currency flow deficit
D) Appreciation
Which is the correct answer?

Answer 1

Under a fixed exchange rate regime, a balance of payments surplus typically leads to upward pressure on the exchange rate, which can result in appreciation of the currency. This is because a surplus indicates that more foreign currency is being exchanged for the domestic currency than the other way around, leading to increased demand for the domestic currency.

Therefore, the correct answer is:

D) Appreciation