The Consequences of a Deficit and a Surplus on the Current Account of the Balance of Payments

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    The Consequences of a Deficit and a Surplus on the Current Account of the Balance of Payments

    • A deficit means that a country is consuming more than it is producing.
      • A deficit will reduce AD, as M (of C + G+ I + (X – M)) is increasing.
      • This will lower the economy’s output, will be likely to raise unemployment, and be likely to lower the price level.
      • A rise in the deficit is also likely to lead to a fall in the exchange rate.
    • A surplus means that a country is producing more than it is consuming, and is hence experiencing a net inflow of money and income.
      • This increase in the money supply will increase bank lending
      • Aggregate demand will also increase due to increased net exports, and hence the exchange rate is likely to increase.

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