Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Increased foreign investment in response to lower trade deficits
B
Reduction in domestic savings due to higher consumption
C
A need to offset the decrease in the current account to maintain overall balance
D
Strengthening of the domestic currency leading to more imports
Understanding the Answer
Let's break down why this is correct
Answer
When a country's net exports decrease, it means that it is selling less to other countries than it is buying from them. This situation often leads to a trade deficit, where the country imports more goods and services than it exports. To balance this deficit, the country may need to attract more foreign investment or borrow money from other countries, which is reflected in the capital and financial account of its balance of payments. For example, if a country starts importing much more oil than it exports, it might see an increase in foreign investments or loans to cover the difference. Therefore, the adjustments in the capital and financial account are primarily driven by the need to finance the trade deficit created by the decrease in net exports.
Detailed Explanation
When net exports go down, it means the country is selling less to other countries. Other options are incorrect because Some might think that less trade means more foreign investment; It's easy to think that higher spending means less saving.
Key Concepts
Balance of Payments
Current Account and Capital Account Dynamics
Net Exports Effects
Topic
Balance of Payments Adjustments
Difficulty
medium level question
Cognitive Level
understand
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