Question

Check each of the following that can lead to negative values in the current account. A....

Check each of the following that can lead to negative values in the current account.

A. exports < imports

B. decreases in trade barriers and emergence of volume imports from Asia

C. higher relative growth in the US compared to other nations

D. large inflows of the capital account allowing Americans to buy more imports

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Answer #1

Option A, B and D leads to the negative value in the current account

Reason: Exports cause an inflow of currency and therefore is considered as an addition in the current account while imports lead to the outflow of domestic currency and therefore is considered as a deduction in currency account. Therefore, lower inflow and higher outflow of currency will cause a negative current account. In all the three options, outflow of currency is higher due to more imports.

Option C will not cause negative value in the current account.

Reason:Higher growth in US will cause more production in U.S. and therefore may cause higher exports and inflow of currency in the U.S. Therefore, this may cause positive value in the current accout.

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