Suppose a country is currently experiencing a trade deficit.In the long run,this could be self-correcting if
A)the deficit exists because of the import demand for capital goods.
B)the deficit exists because of the import demand for consumption goods.
C)the deficit exists because foreigners want to buy the country's currency as an investment.
D)none of the options

Question

Quizplus · Accepted Answer

If the trade deficit exists because of the import demand for capital goods, it indicates that the country is investing in its own productive capacity, which can generate economic growth and export potential in the long run. As a result, the trade deficit may self-correct as the country's export level rises in response to increased productive capacity. On the other hand, if the deficit exists because of the import demand for consumption goods, it suggests that the country's demand for foreign goods is driven by consumer preferences rather than productive investments, which have limited long-term benefits for the economy. Similarly, if the deficit exists because foreigners want to buy the country's currency, it may not necessarily lead to self-correction unless the inflow of foreign capital leads to increased investment and productive capacity. Thus, option A is the best choice.

Suppose a Country Is Currently Experiencing a Trade Deficit