Question

Explain how a shift from a government budget deficit to a budget surplus might affect the exchange rate.

Short answer

When there's a deficit appears, the availability of the currency falls which can further affect the exchange rate. the web exports decreases. And when there's a budget surplus, the provision of the currency increases within the market.

Step-by-step solution

Concept Introduction  

The budget balanceis the values of government revenue and spending. When spending is higher than earning, the budger is said to be in deficit. When the earning of the government i higher than expenses incurred, budget is said to be in surplus.

Explanation of Solution 

When there's an initial deficit, it ends up in the deficit. When the govt deficit moves to budget surplus, this ends up in the depreciation of the charge per unit. this means that the worth of the domestic currency in respect to foreign currencies will fall. Depreciation is principally in favour of exports and against the imports.