What does a current account deficit indicate about a country's foreign asset holdings?

Multiple choice question for Macroeconomic Issues and Analysis. Select an option, then review the explanation below.

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It may decrease its foreign asset holdingsIt may expand its foreign asset holdingsIt may raise its level of savingsIt may boost its foreign currency reservesIt may improve its trade balance

Explanation

A current account deficit typically means that a country is spending more on foreign trade than it is earning, which often results in a reduction of its foreign asset stock to finance the deficit.

Practice related questions from the same subject.

1.Which of the following is NOT considered an advantage of the single market?
2.Within the European Exchange Rate Mechanism (ERM), each member country maintained a fixed exchange rate, and together the group ________ in relation to other countries worldwide?
3.In a country with a floating exchange rate system, what is the likely effect on its currency if its inflation rate exceeds that of its trading partners?
4.In a floating exchange rate system, how do expectations of rising interest rates typically affect the currency's exchange rate?
5.How does a fixed exchange rate combined with full capital mobility affect the effectiveness of monetary policy?

What does a current account deficit indicate about a country's foreign asset holdings?

Explanation

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