Macroeconomics: Open Economy Macroeconomics · Class 12 · CBSE · Commerce Economics
Suppose a country's current account deficit is exactly matched by a surplus in its capital account, with no errors and omissions. What does this impl…
Practice question from Macroeconomics: Open Economy Macroeconomics (Class 12 · CBSE · Commerce Economics), with the correct answer and a step-by-step solution.
hard · MCQ · Q-C00C42
Suppose a country's current account deficit is exactly matched by a surplus in its capital account, with no errors and omissions. What does this imply about its official foreign exchange reserves?
- A.They must increase
- B.They must decrease
- C.They remain unchangedCorrect answer
- D.They become equal to the current account deficit
Solution
A current account deficit represents a net outflow, while a matching capital account surplus represents an equal net inflow. Since the two offset each other, there is no overall balance of payments surplus or deficit, so official foreign exchange reserves remain unchanged.
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