Government believes currency appreciation boosts export revenue due to inelastic demand

Steps:

• Government orders buying domestic currency, increasing its value (appreciation).
• Appreciation raises foreign price of exports.
• If export demand is price inelastic, export quantity falls little, so total export value in foreign currency rises.
• This improves trade balance (part of BOP), aligning with the belief.

Why the correct option is correct:

• Price inelastic export demand means revenue increases with higher prices from appreciation, per basic elasticity definition (percentage change in quantity < percentage change in price).

Why the others are wrong:

• B: Marshall-Lerner >1 means high elasticities, so appreciation worsens trade balance by reducing export volume more than price gain.
• C: Budget deficit may indirectly affect BOP but does not explain forex intervention to appreciate currency.
• D: BOP surplus causes natural appreciation, so intervention would sell (not buy) domestic currency to prevent it.

Final answer: A