Final answer:
If Americans buy more goods from India, thus increasing imports without a corresponding increase in exports, the U.S. current account deficit will increase. This occurs because the trade balance, part of the current account, will become more negative as more money flows out to pay for these imports.
Step-by-step explanation:
If Americans increase their purchases of goods from India, thus increasing imports, this would lead to an increase in the U.S. current account deficit. The current account records a nation’s transactions with the rest of the world – specifically its net trade in goods and services, its net earnings on cross-border investments, and its net transfer payments – over a defined period, such as a year or a quarter.
Because the current account includes the trade balance, which includes imports and exports, an increase in imports with exports holding steady or not increasing equivalently would result in a larger trade deficit. Considering imports as an outflow of money, when they exceed the inflow from exports, the current account balance becomes more negative. This is in line with the general principle that if more money is flowing out of the country, it will make the current account more negative or less positive.
About other potential flows of money, if foreign investors buy more U.S. stocks and bonds, these transactions are recorded in the financial account, not the current account. However, an increase in foreign investment can help to finance a current account deficit. When considering the trade deficit of the United States, if it increases, the current account balance is negatively affected since the trade balance is a major component of the current account. Any financial flows that affect the current account would change the deficit accordingly.