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 financial account deficit.
C)income to exceed absorption.
D)net borrowing from abroad.

Question

Quizplus · Accepted Answer

A rise in investment demand will lead to an increase in imports of capital goods, which will cause the economy to experience net borrowing from abroad. This means that the financial account will have a surplus, while the current account will have a deficit. However, since the question states that the current account balance is already zero, the increase in investment demand will result in a current account deficit, but this will be offset by an equal current account surplus, resulting in a zero current account balance. Therefore, the best choice is D, net borrowing from abroad.

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