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 above

Question

Quizplus · Accepted Answer

If the trade deficit exists because of the import demand for capital goods, it means that the country is investing in productive assets such as machinery and equipment. In the long run, these investments can lead to increased productivity and competitiveness, which can lead to an increase in exports and a decrease in imports. This could eventually lead to a trade surplus and correct the trade deficit. On the other hand, if the trade deficit exists because of the import demand for consumption goods, it means that the country is consuming more than it is producing. This could lead to a decrease in savings and investments, which could hurt the country's long-term economic growth. Finally, if the deficit exists because foreigners want to buy the country's currency as an investment, it means that the country's currency is strong and attractive to investors. While this could help stabilize the currency, it is not a automatic correction mechanism for correcting trade deficits.

Suppose a Country Is Currently Experiencing a Trade Deficit