📚 Learning Guide
Balance of Payments Adjustments
easy

When a country's net exports decrease, this typically results in a decrease in the current account, which requires a corresponding increase in the __________ to maintain balance.

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Learning Path
Learning Path

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Choose the Best Answer

A

financial account

B

trade balance

C

current account

D

foreign reserves

Understanding the Answer

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Answer

When a country's net exports decrease, it means that the value of its exports is less than the value of its imports. This situation negatively affects the current account, which records all transactions related to trade in goods and services. To keep the balance of payments stable, there needs to be a corresponding increase in the capital account, which tracks investments coming into the country. For example, if a country imports more than it exports and sees a drop in its current account, it might attract foreign investments or loans to balance the financial flow. This adjustment helps ensure that the overall economy remains stable despite the changes in trade.

Detailed Explanation

When net exports go down, the country earns less from selling goods abroad. Other options are incorrect because Some might think the trade balance is the answer, but it actually measures exports minus imports; This option seems close, but the current account is what decreases when net exports fall.

Key Concepts

Balance of Payments
Current Account Dynamics
Capital Account
Topic

Balance of Payments Adjustments

Difficulty

easy level question

Cognitive Level

understand

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