If the quantity of foreign currency demanded in the foreign exchange market exceeds the quantity supplied, then there is a:
A) balance of payments surplus.
B) balance of payments deficit.
C) balance of payments equilibrium.
D) none of the above since the demand for and supply of a currency are not related to the balance of payments.

Question

Quizplus · Accepted Answer

When the demand for a foreign currency exceeds its supply in the foreign exchange market, it typically indicates that a country is importing more than it is exporting, leading to a balance of payments deficit. This is because more domestic currency is needed to purchase foreign currency for imports, exceeding the foreign currency coming in from exports.

If the Quantity of Foreign Currency Demanded in the Foreign