Consider the following statements regarding ldquo Current Account Deficit CAD rdquo 1 Current accoun...........

Economic Affairs Public Finance and Debt Management

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Consider the following statements regarding “Current Account Deficit (CAD)”

1.Current account deficit can be financed by a net capital inflow.

2.It is the difference between foreign exchange earned and spent.

3.Tightening of monetary policy by the U.S. Federal Reserve will help in reducing India’s widening CAD.

Which of the statements given above is/are correct?

1 and 2 only

2 and 3 only

1 and 3 only

All of the above

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Explanation:

1 and 2 only

Statement 1: Current account deficit can indeed be financed by a net capital inflow.

Statement 2: Current account deficit represents the difference between foreign exchange earned (exports of goods and services, income from abroad, etc.) and foreign exchange spent (imports of goods and services, payments to foreign factors of production, etc.).

Statement 3: Tightening of the U.S. Federal Reserve's monetary policy may actually lead to outflows from emerging markets like India, which could exacerbate current account deficits rather than reduce them. Therefore, statement 3 is incorrect.