Which of the following statements about the current account (in the balance of payments) is TRUE? If a country has a current account surplus,

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Question restatement: Which of the following statements about the current account (in the balance of payments) is TRUE? If a country has a current account surplus,

Option a: it will have a high GDP.
- This is not a direct implication of a current account surplus. A surplus in the current account indicates net exports and net income/ transfers from abroad, but it does not automatically determine the level of GDP, which depends on aggregate demand, investment, government spending, etc. So this statement misattributes causation.

Option b: it will have a financial account deficit.
- In the balance of payments, the current account balance and the financial (capital) account balance are linked through net capital flows. If the current account is in surplus (country earns more from net exports and flows in from abroad), there must be net capital outflows to keep the overall BOP in balance (assuming there are no errors and omissions). That means the financial account records a deficit to offset the surplus in the current account. This is the standard accounting identity: CA + FA + BCA = 0 (ignoring minor statistical discrepancies). Therefore, a current account surplus typically coincides with a financial account deficit.

Option c: it will have a weaker currency.
- A current account surplus tends to support a stronger currency over time because higher demand for the country’s goods and financial assets increases demand for that country’s currency. A weaker currency is typically associated with a current account deficit via reduced demand for domestic currency or through monetary policy and capital flows. Hence this statement is not generally true.

Option d: it will have a stronger currency.
- While a current account surplus can contribute to currency appreciation, stating it as a guaranteed or direct outcome ignores other factors like monetary policy, capital flows, and market expectations. So this is an incomplete and potentially misleading claim.

Summary: The reasoning for each option highlights why the first, third, and fourth statements are not consistent with standard balance-of-payments logic when a current account surplus exists, while the second statement correctly reflects the typical offsetting behavior between the current and financial accounts. The reasoning relies on the accounting identity and the interpretation of capital flows in the BOP framework, where a surplus in one account is balanced by a deficit in the other to keep the overall balance zero (excluding statistical discrepancies).

ECF1200 - S2 2025 Practice Exam 2

Which of the following statements about the current account (in the balance of payments) is TRUE? If a country has a current account surplus,

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