A capital account surplus might be expected to cause a current account deficit because the associated ?
Correct answer: C. capital inflow would cause the nation's currency to appreciate contributing to a trade deficit
- A. capital outflow would cause the nation's currency to depreciate contributing to a trade deficit
- B. capital inflow would cause the nation's currency to depreciate contributing to a trade deficit
- C. capital inflow would cause the nation's currency to appreciate contributing to a trade deficit
- D. capital outflow would cause the nation's currency to appreciate contributing to a trade deficit
Explanation
A capital-account surplus generally reflects capital inflows, which increase demand for the domestic currency and cause appreciation. An appreciated currency makes exports less competitive and imports cheaper, contributing to a current-account or trade deficit.
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