Concept:A balance of payment surplus means the total payments received from abroad exceed total payments made to other countries.
In this situation, the best use of the extra foreign currency is to strengthen the nation’s external financial position.
Explanation:When an economy records a balance of payment surplus, the inflow of foreign exchange is greater than the outflow.
This inflow creates an opportunity to save part of the earnings in a safe form.
The most appropriate action is to add the surplus to the country’s foreign reserves.
Foreign reserves act as a buffer against future economic shocks, help maintain exchange rate stability, and build confidence in the economy.
Devaluing the currency or borrowing from abroad are measures usually adopted when there is a deficit, not a surplus.
Promoting imports could reduce the surplus, but it is not the best alternative because the country would lose the benefit of the surplus.
Thus, increasing foreign reserves is the wisest policy option after a surplus.
Answer:D. increase its foreign reserve