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Question
Statistics
Posted 5 months ago
Kundu initially had a financial account balance, but then its exports increased.
Which of the following will occur as a result of an increase in exports?
Choose 1 answer:
(A) The current account will move to a deficit
(B) The current account and financial account will be equal
(c) The financial account will equal zero
(D) The current account will equal zero
(E) The financial account will move to a deficit
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Answer from Sia
Posted 5 months ago
Solution by Steps
step 1
Understand the relationship between exports and the current account: An increase in exports leads to an increase in the current account balance, as exports are a credit in the balance of payments
step 2
Analyze the impact on the financial account: When the current account increases due to higher exports, the financial account will move towards a deficit if the financial account was initially balanced, because the sum of the current and financial accounts must equal zero (double-entry bookkeeping in balance of payments)
step 3
Identify the correct answer: Based on the information given and the understanding of balance of payments, the correct outcome of an increase in exports, with an initially balanced financial account, is that the financial account will move to a deficit
Answer
E
Key Concept
Balance of Payments Adjustment
Explanation
An increase in exports leads to a surplus in the current account, which must be balanced by a deficit in the financial account if the financial account was initially balanced.
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