Eliminating BOP Surplus with Currency Appreciation and Lower Interest Rates

Steps:

• Recognize BOP surplus as excess foreign receipts over payments, needing reduction via lower net exports or capital inflows.
• Consider exchange rate effects: appreciation raises export prices and lowers import prices, cutting exports and boosting imports.
• Evaluate monetary policy: cutting interest rates discourages foreign investment inflows, reducing capital account surplus.
• Combine policies: appreciation targets current account, rate cut targets capital account for overall surplus elimination.

Why B is correct:

• Appreciation worsens current account balance by reducing export competitiveness (Marshall-Lerner condition); rate cuts reduce capital inflows via interest rate parity, directly shrinking BOP surplus.

Why the others are wrong:

• A: Depreciation boosts net exports, increasing surplus; higher spending expands economy but amplifies surplus.
• C: Money supply increase is expansionary, potentially raising imports but not targeting surplus; pay freeze controls costs without BOP impact.
• D: Tax hikes contract economy, lowering imports and improving current account, thus increasing surplus.

Final answer: B