Question : When a country's current account deficit increases, its capital account balance is likely to:
Option 1: Increase
Option 2: Decrease
Option 3: Remain unchanged
Option 4: It is not related to the current account deficit
Correct Answer: Decrease
Solution : The correct answer is (b) Decrease.
The current account and capital account are interconnected in the Balance of Payments. A current account deficit means that a country is importing more goods and services, or it is earning less from its exports, compared to its expenditures on imports. This implies a net outflow of funds from the country.
To finance the current account deficit, the country may need to attract capital from foreign sources. This can be done through the capital account, which records financial transactions involving changes in ownership of non-financial assets and capital transfers.
An increased current account deficit indicates a greater need for capital inflows to balance the deficit. Therefore, it is likely that the capital account balance will decrease as a result of the increased current account deficit.
To summarize, an increase in the current account deficit is likely to lead to a decrease in the capital account balance.
Question : When a country's current account surplus increases, its capital account balance is likely to:
Option 4: It is not related to the current account surplus
Question : A country's balance of payments can be in equilibrium when:
Option 1: Its exports equal its imports
Option 2: Its capital inflows equal its capital outflows
Option 3: Its current account balance is zero
Option 4: All of the above
Question : If a country experiences a decrease in its foreign exchange reserves, it indicates:
Option 1: A surplus in the current account
Option 2: A deficit in the current account
Option 3: A surplus in the capital account
Option 4: A deficit in the capital account
Question : When a country experiences a depreciation in its currency, it will likely have a positive impact on its:
Option 1: Imports
Option 2: Exports
Option 3: Current account balance
Option 4: Capital account balance
Question : If a country experiences an increase in its foreign exchange reserves, it indicates:
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