A country with an exchange rate determined by market forces and a current account _____ has a capital account _____. Group of answer choicesdeficit; deficitsurplus; surplusdeficit; surplussurplus; balance equal to zero
Question
A country with an exchange rate determined by market forces and a current account _____ has a capital account _____. Group of answer choicesdeficit; deficitsurplus; surplusdeficit; surplussurplus; balance equal to zero
Solution
The balance of payments of a country is always zero because of the double-entry bookkeeping method used in accounting. This means that if a country has a current account deficit, it must have a capital account surplus, and vice versa.
So, if a country has a current account deficit, it means it is spending more on foreign trade (imports) than it is earning (exports). To finance this deficit, it must either use its reserves or borrow from other countries, creating a capital account surplus.
Therefore, the answer is: A country with an exchange rate determined by market forces and a current account deficit has a capital account surplus.
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