ECONOMICS
BALANCE OF PAYMENTS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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A when the government adopts a deflationary macroeconomic policy
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B when the government devalues the currency
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C when the prices of imported products that are demand-inelastic increase significantly
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D when tariffs are placed on imported products that are demand-elastic
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Detailed explanation-1: -If a country can attract more financial flows (either short-term portfolio investment or long-term direct investment), then these flows on the financial account will enable the country to run a larger current account deficit.
Detailed explanation-2: -➢ A deficit on the current account means that the value of imports is greater than the value of exports. ➢ A surplus on the current account means that the value of imports is less than the value of exports.
Detailed explanation-3: -What is Balance of Payment Deficit? A balance of payment deficit in a country can arise if said country imports more capital, goods and services than it exports. This BoP deficit can be balanced by utilising the country’s foreign exchange reserves to meet the BoP shortfall.
Detailed explanation-4: -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.