Suppose the United States is experiencing a balance of payments surplus. To prevent the exchange rate from appreciating, the U.S. Treasury must

Question

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If the United States is experiencing a balance of payments surplus, this means that there is a higher demand for U.S. dollars from foreign countries than there is demand for foreign currencies from the United States. This will lead to an appreciation of the U.S. dollar, which can hurt U.S. exports and worsen the trade balance.

To prevent the exchange rate from appreciating, the U.S. Treasury can intervene in the foreign exchange market by selling dollars and buying foreign currency. This will increase the supply of dollars in the market, reducing its value relative to other currencies.

Selling foreign currency and buying dollars (choice A) would be the opposite of what is needed to achieve the desired result, and buying both dollars and foreign currency (choice D) would not intervene in the exchange rate at all. Selling both dollars and foreign currency (choice C) could be an option, but it is not necessary if the goal is to prevent the exchange rate from appreciating.

Suppose the United States Is Experiencing a Balance of Payments