📚 Learning Guide
Balance of Payments Adjustments
hard

Which of the following statements are true regarding the adjustments in the balance of payments when net exports decrease? Select all that apply.

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Choose the Best Answer

A

A decrease in net exports directly increases the capital account to maintain balance.

B

Adjustments in the financial account are necessary to counterbalance the decline in the current account.

C

A decrease in the current account may lead to a depreciation of the country's currency.

D

The decrease in net exports has no effect on the overall balance of payments.

E

The capital account can only increase through foreign investment when net exports decrease.

Understanding the Answer

Let's break down why this is correct

Answer

When net exports decrease, it means that a country is selling less to other countries than it is buying from them. This situation can lead to a trade deficit, where imports exceed exports. As a result, the balance of payments, which keeps track of all economic transactions between a country and the rest of the world, will show a negative adjustment. For example, if a country imports more cars than it exports, it may need to borrow money from foreign lenders to pay for those cars, which would be reflected in its balance of payments. Therefore, a decrease in net exports can lead to adjustments like increased foreign debt or changes in currency value to balance the economy.

Detailed Explanation

When net exports decrease, it affects the balance of payments in ways not shown in the options. Other options are incorrect because This suggests that a drop in exports would directly boost the capital account; This implies that the financial account must always adjust when the current account drops.

Key Concepts

Balance of Payments
Current Account and Capital Account
Currency Valuation
Topic

Balance of Payments Adjustments

Difficulty

hard level question

Cognitive Level

understand

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