If a country has a flexible exchange rate system and a deficit on capital account
A) the balance of payments must be negative.
B) The balance of payments must be positive.
C) The balance on current account must be positive.
D) The balance on current account must be negative.

Question

Quizplus · Accepted Answer

In a flexible exchange rate system, a deficit on the capital account implies that there is an outflow of capital greater than the inflow. To balance this, the current account must be positive, indicating that the country is exporting more than it is importing, thus earning more foreign currency than it spends.

If a Country Has a Flexible Exchange Rate System and a Deficit