Under the fixed exchange rate system,
1. Is it possible for a country to have positive balances for both of its current account and capital account at the same time? If so, is the situation sustainable or not? Explain.
2. Is it possible for a country to have negative balances for both of its current account and capital account at the same time? If so, is the situation sustainable or not? Explain.
1. It’s actually possible for a country on economic
grounds to have positive balances for its current account, which
indicates country's trade balance plus net income and direct
payments and measures its balance of payments in terms of Exports
as credits and Imports as Debit. A country may have a large current
account surplus because of relatively weak domestic demand leading
to lower consumer spending and lower spending on imports. And the
capital account records purchase and sale transactions of foreign
assets and liabilities during a particular year, and a positive
balance of capital account indicates net inflow of money into the
country, which indeed is a healthy sign for a country’s economy. To
put it in nutshell, it can be possible for a country to have
positive balances of Capital & Current account in the form of
net cash inflow aftermath the higher export rate.
2. Negative balance on Country’s Current account
indicates relatively more imports for the reason of more demand of
foreign products relative to the domestic output. Higher imports
result in negative balance in the current account possibly because
of net cash outflow in the form of purchases, and hence resulting
in negative Capital account balance of the country as well. So it
is very much possible for a country to have negative balances of
both, its capital and current account.
Under the fixed exchange rate system, 1. Is it possible for a country to have positive...
Under the pure flexible exchange rate system, 1. Is it possible for a country to have positive balances for both of its current account and capital account at the same time? If so, is the situation sustainable or not? Explain. 2. Is it possible for a country to have negative balances for both of its current account and capital account at the same time? If so, is the situation sustainable or not? Explain.
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