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16 June, 20:27

In a freely floating exchange rate system, if the current account is running a deficit, what are the consequences for the nation's balance on financial account and its overall balance of payments?

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  1. 16 June, 20:45
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    If the current account is running in as deficit, the capital account must be running in a surplus equal to the same amount and thus the overall balance of the payments is same as before.

    Explanation:

    In a freely floating exchange rate system, the nation's balance of payments must always be zero.

    So if the current account is running in as deficit, the capital account must be running in a surplus equal to the same amount and thus the overall balance of the payments is same as before.
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