Question

1. Why would a country want to avoid an excessively large current account surplus?
   1. It causes a decrease in net foreign assets
   2. It results in too much foreign direct investment (FDI), which gives foreign companies and countries control over domestic capital
   3. It leads to contractionary monetary policy and higher interest rates, which decreases aggregate demand and can cause a short-run decrease in output
   4. It implies that domestic consumption is too high, and people are living beyond their means
   5. none of the above

While I just want to know why C is wrong, thanks.

Answer 1

C is wrong answer because whenever country have higher surplus in the account that means country's people likes to purchase the domestic product only and country have high exports so in such condition why any central bank will adopt the contractionary Monetary policy. if it does so than goods and services in our country will be more costier because of high cost of borrowing for the Producers and the service providers which will leads to decrease in the demand of the domestic product and leads to decrease in Export too because our goods is more costier now without any improvement in goods so in such situation any central bank will not take a step to make its country's position worse so they would not take the Contractionary Monetary Policy hence the Option C is Wrong one.