Suppose the current account of a country is in balance and the official settlements account equals zero. A new transaction occurs so that the current account is now in surplus, but the official settlements account does not change. From this we know that
A) the balance of trade is now in surplus.
B) the government is running a budget deficit.
C) the capital and financial account is now in deficit.
D) the government must make official reserve transactions.

Question

Quizplus · Accepted Answer

When the current account moves into surplus without a change in the official settlements account, it implies that there is an outflow in the capital and financial account, leading to a deficit in that account. This is because the balance of payments accounts (current account, capital and financial account, and official settlements account) must sum to zero. If the current account surplus does not lead to an accumulation of reserves (official settlements account unchanged), the surplus must be offset by a deficit in the capital and financial account.

Suppose the Current Account of a Country Is in Balance