Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
An increase in foreign direct investment as capital inflows rise to offset the current account deficit.
B
A decrease in government spending on domestic programs leading to a surplus in the capital account.
C
A rise in domestic savings rates that reduces imports and improves the current account.
D
A decrease in the exchange rate which would further worsen the current account deficit.
Understanding the Answer
Let's break down why this is correct
Answer
When a country experiences a decrease in net exports, it means that it is selling less to other countries than it is buying from them. This situation can lead to a trade deficit, where the country spends more on imports than it earns from exports. To maintain balance in the payments, the country might adjust by decreasing its imports or increasing its exports. For example, if a country that usually exports cars sells fewer cars due to a global economic downturn, it might respond by encouraging local companies to reduce their imports of foreign goods. This adjustment helps to balance the payments by ensuring that the money flowing in and out of the country is more equal.
Detailed Explanation
When a country sells less to other countries, it can lose money. Other options are incorrect because Cutting government spending does not directly fix trade problems; Saving more at home does not automatically reduce imports.
Key Concepts
Balance of Payments
Current Account and Capital Account Relationship
Net Exports
Topic
Balance of Payments Adjustments
Difficulty
medium level question
Cognitive Level
understand
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