Opportunities in High-Yield Investments Attracting Capital from Abroad

High-Yield Investment Opportunities

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Question

If high-yield investment opportunities attract capital from abroad and lead to a capital account surplus, then the

Answers

A. nation will also experience a balance of trade surplus.

B. nation must run a current account surplus under a pure flexible exchange rate system.

C. nation's currency must depreciate.

D. nation must run a current account deficit under a pure flexible exchange rate system.

E. nation's currency must appreciate.

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Explanations

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A. B. C. D. E.

If a nation is experiencing a surplus on its capital account balance, it must experience an offsetting deficit on its current account and vice versa. By definition, the balance of payments must be in balance so that the capital account offsets the current account.

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