When a country experiences a balance of payments surplus in a fixed exchange rate system, it usually _______ the currency to reduce exports.

Question

Quizplus · Accepted Answer

In a fixed exchange rate system, a balance of payments surplus implies that there is an excess demand for the domestic currency. To address this, the central bank may allow the revaluation of the currency by increasing its value relative to other currencies. This would make exports more expensive and reduce the demand for them, which would help to reduce the surplus in the balance of payments. A devaluation (Choice D) would have the opposite effect and make exports cheaper, which would increase the surplus. Holding the value constant (Choice A) is not feasible when there is excess demand for the currency, and abandoning the fixed exchange rate system (Choice B) would require a significant policy shift that may not be desirable or feasible.

When a Country Experiences a Balance of Payments Surplus in a Fixed