How do the deficit BoP and surplus BoP impact the exchange rate?

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Solution

(i) Deficit Balance of Payments: If the balance of payments of a country shows deficit, demand for foreign currency will increase. Accordingly, exchange rate is is expected to rise. Domestic currency will depreciate in relation to foreign currency.

(ii) Surplus Balance of Payments: If the balance of payments of a country shows surplus, availability of appreciate in relation to foreign currency.

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