Question

question 9 (1 point)
if the demand - side effects of increased investment spending occur before the supply - side effects, what is the most likely evolution of the current account balance over time?
○ the current account balance remains unchanged as supply - side effects offset demand - side effects (applies only when simultaneous effects occur).
○ the current account balance moves from surplus to deficit as absorption increases.
○ the current account balance initially worsens but later improves as national income rises.
○ the current account balance remains consistently in surplus, which is highly improbable due to immediate absorption increases.

Explanation:

1. Analyze the demand - side first: Increased investment spending (demand - side effect) initially leads to higher absorption (spending on domestic and foreign goods). This increases imports (or reduces net exports), so the current account balance worsens (e.g., moves toward deficit or becomes more negative if it was in deficit, or reduces surplus).
2. Then the supply - side effect: Over time, the increased investment (if it's productive) will increase the country's productive capacity (supply - side). This leads to increased exports or reduced imports (as domestic production can meet more demand), which improves the current account balance.
3. Evaluate the options:

• Option 1: The effects are not simultaneous, so this is incorrect.
• Option 2: The movement from surplus to deficit is only the initial part; it will improve later, so this is incomplete.
• Option 3: Matches the initial worsening (due to demand - side absorption increase) and later improvement (due to supply - side production increase and national income's positive impact on exports/imports balance).
• Option 4: The current account will not remain in surplus as the initial demand - side effect increases absorption and worsens the current account.

Answer:

The current account balance initially worsens but later improves as national income rises.