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CFA Level I · CFA Level I Exam · Capital Flows and the FX Market

A country runs a persistent current account deficit. Holding other components constant, the balance of payments identity most likely implies that the country must have:

The country most likely has a net financial account inflow. Because the balance of payments sums to zero, a current account deficit must be financed by foreigners buying domestic assets or lending, which produces a financial account surplus of equal size.

  1. Aa net financial account inflowCorrect
  2. Ba net financial account outflow
  3. Can increase in its official reserve assets only

Explanation

The current account, capital account and financial account sum to zero (ignoring statistical discrepancy). A current account deficit must be offset by a surplus in the financial account, meaning net capital inflows, as foreigners acquire domestic assets or lend to the country.

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