When a country has a capital inflow, the exchange rate appreciates and the current account moves into a deficit.

Question

Quizplus · Accepted Answer

Capital inflow increases the demand for the country's currency, leading to an appreciation of the exchange rate. This makes imports cheaper and exports more expensive on the global market, which can cause the current account to move into a deficit due to increased imports and reduced exports.

When a Country Has a Capital Inflow, the Exchange Rate