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Terms in this set (75)

-if the current account is in deficit then the capital account will have to be in surplus to balance out the current account deficit
this means
1) foreign exchange reserves may be used in order to increase capital account and so to regain balance with a deficit in the current account
-if reserves are taken form the official reserve account, then they are a positive entry into the capital account
-no country is able to fund long term current account deficit from its reserves, eventually the reserves would run out
2)high level of buying of assets for ownership is financing the current account deficit
-foreign investors may be purchasing things like property and businesses, the inflow into the capital account is funding the current account deficit, since it is based upon foreign confidence it is not considered to be harmful
-but if foreign ownership of domestic assets becomes to great there is a fear that this would lead to a threat of economic sovereignty
-if there is a drop in confidence then foreign investors might prefer to shift their assets to another country
-selling the assets would result in an increase in the supply of currency and a fall in its value
3)may be financed by high levels of lending from abroad
-high rates of interest tares will have to be paid, which will be a short term drain to the economy, will increase the current account deficit in years to come
-the governments or people lending the money may withdraw their money and place it somewhere else
-lead to massive selling of the currency and a very sharp fall in exchange rate