When a country has a current account deficit, the country
A)is always borrowing from domestic residents.
B)is always lending abroad.
C)always has a large government budget surplus.
D)always has a large government budget deficit.
E)is always borrowing from abroad.

Question

Quizplus · Accepted Answer

A current account deficit means that a country is spending more on imports and foreign financial investments than it is receiving from exports and foreign investments in its own economy. To make up for this deficit, the country must borrow from abroad, hence the correct choice is E. A current account deficit does not necessarily indicate anything about the government's budget surplus or deficit, so choices C and D are incorrect. Choice A is also incorrect because borrowing from domestic residents is not the only way to finance a current account deficit, as a country can also borrow from abroad. Lastly, choice B is incorrect as a current account deficit means the country is borrowing (not lending) abroad.

When a Country Has a Current Account Deficit, the Country