Which of the following characterizes a country's current account?
A) A country's current account deficit has to be financed by both purchases and sales of assets.
B) A country experiencing a current account deficit will see its currency appreciate.
C) A country's current account balance consists of exports plus imports of merchandise and services minus income on the country's assets abroad.
D) A country experiencing a current account surplus will see its currency depreciate.

Question

Which of the following characterizes a country's current account? 
A) A country's current account deficit has to be financed by both purchases and sales of assets. 
B) A country experiencing a current account deficit will see its currency appreciate. 
C) A country's current account balance consists of exports plus imports of merchandise and services minus income on the country's assets abroad. 
D) A country experiencing a current account surplus will see its currency depreciate.

Quizplus · Accepted Answer

CA country's current account deficit is indeed financed by transactions in the financial account, which includes both purchases and sales of assets. The current account balance consists of the trade balance (exports minus imports of goods and services), net income from abroad, and net current transfers. This means it includes more than just exports and imports of merchandise and services; it also considers income on the country's assets abroad, making option C partially incorrect in its explanation but correct in the context that it addresses components of the current account. Options B and D are incorrect because they oversimplify the complex relationship between current account balances and currency valuation; a deficit or surplus can influence currency value, but the direction of this influence depends on numerous factors, not a straightforward cause-and-effect relationship.

Which of the Following Characterizes a Country's Current Account