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    Question

    In the Balance of Payments (BoP) accounting, a surplus

    in the Current Account must be matched by:
    A A surplus in the Capital Account. Correct Answer Incorrect Answer
    B A deficit in the Capital and Financial Account. Correct Answer Incorrect Answer
    C An increase in official foreign exchange reserves. Correct Answer Incorrect Answer
    D Either a deficit in the Capital and Financial Account or an increase in reserves. Correct Answer Incorrect Answer
    E A surplus in the trade balance only. Correct Answer Incorrect Answer

    Solution

    The BoP must always balance. By identity: Current Account (CA) + Capital and Financial Account (KA) + Errors & Omissions = 0. Therefore, if CA > 0 (surplus), then (KA + Reserve Change) must be negative, implying either a net capital outflow (KA deficit) or an increase in official reserves (which is recorded as a negative/credit item? Wait carefully: an acquisition of reserves is a debit in the financial account). More precisely: CA Surplus = Net Capital Outflow (KA Deficit) OR a build-up of foreign assets (including reserves). Option (d) captures this.

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