Question : A country with a trade surplus is likely to experience:
Option 1: Appreciation of its currency
Option 2: Depreciation of its currency
Option 3: No impact on its currency
Option 4: A fixed exchange rate
Correct Answer:
Appreciation of its currency
Solution : The correct answer is a) Appreciation of its currency
When a country has a trade surplus, it means that the value of its exports exceeds the value of its imports. This results in a net inflow of foreign currency into the country. To balance this surplus, the country's currency is in greater demand, causing its value to appreciate relative to other currencies. The increased demand for the country's currency is driven by foreign entities needing to exchange their currency for the country's currency to pay for its exports. Therefore, a trade surplus often leads to the appreciation of the country's currency.
