Question

How does a central bank mange Balance of Payments (BOP) deficit or surplus?

Answer 1

CENTRAL BANK PLAY CRITICAL ROLE IN BALANCE OF PAYMENT

TRADE DEFICITS OCCUR WHEN DEMAND OF IMPORTS IS HIGH AND EXPORT IS LOW, THIS MEANS THAT DOMESTIC DEMAND FOR FOREIGN CURRENCY INCREASED, NOW TO MANAGE THIS CENTRAL BANK BUYS DOMESTIC CURRENCY AND SELL FOREIGN CURRENCY IN FOREIGN EXCHANGE MARKET

IN OPPOSITE SITUATION, I.E WHEN THERE IS TRADE SURPLUS AND EXPORT IS HIGH THAN IMPORTS, NOW THE CENTRAL BANK BUYS FOREIGN CURRENCY IN FOREIGN EXCHANGE MARKET.