Suppose initially Canada has all its international payments accounts in balance (no surplus or deficit). Then Canadian firms increase the amount they export to Japan, and the Japanese finance the increase by borrowing from Canada. In Canada, everything else remaining the same, there will now be a
A)current and financial account surplus and capital account surplus.
B)current and financial account surplus and capital account deficit.
C)current and financial account deficit and capital account surplus.
D)current and financial account deficit and capital account deficit.
E)current and financial account deficit and capital account balance.

Question

Quizplus · Accepted Answer

An increase in exports to Japan will lead to an increase in Canadian receipts from Japan, causing a surplus in both the current account (exports are a credit, imports are a debit) and the financial account (Canada is lending money to Japan). However, since Japan is borrowing from Canada to finance their increased purchases, there will be a capital account deficit in Canada (outflow of funds to Japan to finance their borrowing). Therefore, the correct answer is B, as there is a current and financial account surplus and a capital account deficit.

Suppose Initially Canada Has All Its International Payments Accounts in Balance