Question

When there is a current account surplus (pick the best one):

a) The balance of payments depends on the net flows of investment and trade.
b) The surplus cannot persist due to re-equilibration of the FX market
c) There must be a financial account deficit
d) The balance of payments is in deficit.

Answer 1

A current account surplus indicates that there must be a financial account deficit, as the surplus reflects the country being a net lender and results in an outflow of domestic investment capital abroad.

Step-by-step explanation:

When there is a current account surplus, the best statement among the options provided is that there must be a financial account deficit. This situation occurs because international flows of goods and services are closely connected to the international flows of financial capital. If a country has a current account surplus, it means that the country is a net lender to the rest of the world, and just like a trade surplus signifies an overall outflow of investment capital, a surplus in the current account indicates that domestic investors are investing their funds abroad. Consequently, there must be an offsetting financial account deficit, reflecting the outflow of investment capital.