CFA Level I · CFA Level I Exam · Capital Flows and the FX Market
A country has a current account deficit that is most likely financed by:
A current account deficit is most likely financed by a surplus in the capital and financial accounts, meaning net inflows of foreign capital. The balance of payments must sum to zero, so net borrowing or asset sales to foreigners offset the shortfall from current transactions.
- Aa surplus in its combined capital and financial accountsCorrect
- Ban increase in its official reserve assets
- Ca surplus in its trade in goods account
Explanation
The balance of payments must sum to zero, so a current account deficit is offset by net capital inflows recorded as a surplus in the capital and financial accounts. A reserve increase would widen the need for financing, and a goods surplus would reduce rather than create a deficit.
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