The United States has a balance of payments surplus with Europe. We would therefore expect the supply of euros to be __________ the demand for euros. Consequently, the euro should __________.
A) less than; appreciate
B) greater than; depreciate
C) less than; depreciate
D) greater than; appreciate

Question

Quizplus · Accepted Answer

A balance of payments surplus means that more money is flowing into the US from Europe than out of the US to Europe. This leads to an increase in the supply of euros and a decrease in the demand for euros. According to the law of supply and demand, when the supply of a currency increases relative to its demand, the value of the currency should decrease. Therefore, the euro should depreciate. Option D is the only choice that reflects this scenario.

The United States Has a Balance of Payments Surplus with Europe