A small open economy has exports equal to 10,imports equal to 7,and foreign debt service obligations of 4.I: The country has a current account deficit.II: The country is moving deeper into debt.
A) I is true; II is not.
B) II is true; I is not.
C) Both I and II are true.
D) Neither I nor II is true.

Question

Quizplus · Accepted Answer

The current account deficit is equal to the difference between exports and imports plus net foreign debt service obligations. In this case, the current account deficit is equal to 10 - 7 + 4 = 7. This means that the country is importing more goods and services than it is exporting, and it is also paying more in foreign debt service obligations than it is receiving in foreign aid. As a result, the country is moving deeper into debt.

A Small Open Economy Has Exports Equal to 10,imports Equal