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 above

Question

Quizplus · Accepted Answer

If a country must make a net payment to foreigners because of a balance-of-payments deficit, it means that the country is importing more than it is exporting, or there is an outflow of capital from the country. In this case, the country can either run down its official reserve assets or borrow anew from foreigners to make the payment. Hence, option B is the best choice. Option A is incorrect because increasing official reserve assets means increasing foreign currency reserves, which may not be feasible in the short run. Option C is also incorrect because lending more to foreigners may not address the balance-of-payments deficit issue. Option D is incorrect because an action is required to address the balance-of-payments deficit.

If a Country Must Make a Net Payment to Foreigners