📚 Learning Guide
Balance of Payments Adjustments
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If a country's net exports decline significantly, which of the following adjustments is most likely to occur in its balance of payments?

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Choose the Best Answer

A

Increase in the capital and financial account

B

Decrease in the capital and financial account

C

No change in the capital and financial account

D

Decrease in the current account without any adjustments

Understanding the Answer

Let's break down why this is correct

Answer

When a country's net exports decline, it means that it is selling less to other countries than it is buying from them. This situation can lead to a deficit in the balance of payments, which records all economic transactions between residents of the country and the rest of the world. To adjust for this deficit, the country may need to attract foreign investment or borrow money from other countries to balance its payments. For example, if a country exports fewer cars but imports more electronics, it might encourage foreign companies to invest in local factories to create jobs and improve its economy. In this way, the country can help restore balance and support its currency value.

Detailed Explanation

When net exports go down, the country sells less to other countries. Other options are incorrect because Some might think that a decline in exports means less investment money; It's a common mistake to think nothing changes when exports drop.

Key Concepts

Balance of Payments
Current Account and Capital Account Dynamics
Currency Valuation
Topic

Balance of Payments Adjustments

Difficulty

medium level question

Cognitive Level

understand

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