A small open economy has a current account balance of zero.A rise in its investment demand causes
A)a current account surplus.
B)a capital account deficit.
C)income to exceed absorption.
D)net borrowing from abroad.

Question

Quizplus · Accepted Answer

When there is a rise in investment demand, the country will need to borrow capital from abroad to finance this investment, resulting in net borrowing from abroad. This will lead to a capital account deficit, as more capital flows out of the country than in. However, the current account balance does not necessarily change, as any increase in imports to support the investment is offset by an increase in exports due to increased production. Therefore, the current account can remain balanced even as the capital account is in deficit.

A Small Open Economy Has a Current Account Balance of Zero.A