ECONOMICS
BALANCE OF PAYMENTS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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A devalue the currency
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B increase government spending
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C increase tax rates
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D reduce tariffs on imports
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Detailed explanation-1: -Hence, a rising current account deficit leads to an increased supply of a nation’s currency in the foreign exchange markets. Therefore, in the currency market there will be an outward shift of supply. This – ceteris paribus – might lead to the external value of the currency falling.
Detailed explanation-2: -Statement 3 is correct: The Balance of Payments (BoP) includes both the current account and capital account, in the capital account there is the nation’s imports and exports of capital and foreign aid.
Detailed explanation-3: -The exchange rate exerts a significant influence on the trade balance, and by extension, on the current account. An overvalued currency makes imports cheaper and exports less competitive, thereby widening the current account deficit or narrowing the surplus.
Detailed explanation-4: -Note. A balance of payments deficit means the country imports more goods, services, and capital than it exports. It must borrow from other countries to pay for its imports.