A small open economy has a current account balance of zero.A rise in its investment demand causes
A)a current account surplus.
B)a capital and financial account deficit.
C)income to exceed absorption.
D)net borrowing from abroad.

Question

Quizplus · Accepted Answer

If there is a rise in investment demand, the domestic saving may not be sufficient to finance domestic investment, so the economy will need to borrow from abroad in order to finance this investment. This will result in a net borrowing from abroad and a capital and financial account deficit. The current account balance remains at zero as the increase in imports for investment is offset by an increase in exports due to higher investment activity.

A Small Open Economy Has a Current Account Balance of Zero.A