International Trade and Capital Flows

Correct Answer: Increased access to a wider variety of goods and services for consumers

Increased access to a wider variety of goods and services for consumers is a potential benefit of a country engaging in international trade. By opening its markets to foreign goods and services, a country allows its consumers to choose from a broader range of products that may not be available or may be more expensive to produce domestically. Reduced competition for domestic industries, leading to higher prices for consumers, is not a benefit but rather a drawback of protectionist trade policies that limit international trade. Such policies may shield domestic industries from foreign competition but often result in higher prices and fewer choices for consumers. Decreased economic growth due to the outflow of capital to foreign markets is also not a benefit of international trade. In fact, engaging in trade can stimulate economic growth by allowing countries to specialize in producing goods and services in which they have a comparative advantage, leading to increased efficiency and productivity.

Correct Answer: The country's domestic currency is likely to appreciate, making its exports less competitive

The most likely outcome when a country experiences a significant and persistent capital account surplus is that the country's domestic currency will appreciate, making its exports less competitive. A capital account surplus occurs when the inflow of foreign capital into a country exceeds the outflow of domestic capital. This net inflow of capital increases the demand for the country's currency, putting upward pressure on its exchange rate. As the currency appreciates, the country's exports become more expensive for foreign buyers, reducing their competitiveness in international markets. The other two options are less likely: - A decline in domestic interest rates is not a direct consequence of a capital account surplus. In fact, the increased demand for the country's currency may lead to higher interest rates to attract more foreign capital. - A capital account surplus typically leads to an increase in foreign exchange reserves, not a decrease. The central bank may intervene in the currency market by buying foreign currency to mitigate the appreciation of the domestic currency, resulting in an accumulation of foreign exchange reserves.

Correct Answer: Increased domestic investment and economic growth

Increased domestic investment and economic growth is a potential benefit for a country with a significant and persistent capital account deficit. A capital account deficit means that a country is a net borrower from the rest of the world. The inflow of foreign capital can be used to finance domestic investment, which can stimulate economic growth and development. The other answers are incorrect: Reduced reliance on foreign capital and enhanced financial stability - A capital account deficit implies reliance on foreign capital, not reduced reliance. It can also make a country more vulnerable to sudden stops or reversals in capital flows. Improved current account balance and stronger currency value - A capital account deficit is often associated with a current account deficit, not an improved current account balance. It can also lead to currency depreciation, not appreciation, if foreign investors lose confidence in the country's ability to service its external debts.