If a country must make a net payment to foreigners because of a balance-of-payments deficit,the country should
A)either increase its official reserve assets or borrow anew from foreigners.
B)either run down its official reserve assets or borrow anew from foreigners.
C)either run down its official reserve assets or lend more foreigners.
D)none of the options

Question

Quizplus · Accepted Answer

If a country has a balance-of-payments deficit, it means that it is spending more money abroad than it is earning from foreign sources. As a result, the country needs to make a net payment to foreigners to make up the difference. To do this, it can either run down its official reserve assets (such as foreign exchange reserves) or borrow anew from foreigners. Running down its reserve assets means using up its savings to pay for the deficit, while borrowing anew means taking out loans from foreign entities to cover the shortfall. Neither of these options is ideal, as they both come with their own risks and costs. However, they are the most effective ways for a country to address a balance-of-payments deficit. Lending more to foreigners (option C) would only exacerbate the deficit, and increasing official reserve assets (option A) would require the country to generate more foreign exchange earnings to add to its reserve holdings, which may not be feasible in the short term.

If a Country Must Make a Net Payment to Foreigners