Given the Following Diagram, with Flexible Exchange Rates

Multiple Choice

Given the following diagram, with flexible exchange rates:

Assume that the economy is in domestic equilibrium. In this situation, there will be __________ in the country's balance of payments (official reserve transactions balance) , with the consequence that the country's currency will __________ in the foreign exchange markets.

A) an incipient deficit; depreciate
B) an incipient deficit; appreciate
C) an incipient surplus; depreciate
D) an incipient surplus; appreciate