Balance of Payments and Currency Depreciation

Very Hard International Economics Balance Of Payments

Consider the following scenario involving Country X, which has a current account deficit and is simultaneously experiencing an influx of foreign capital. The central bank of Country X is actively engaging in open market operations to influence the supply of money in the economy. Given the balance of payments framework, which of the following statements regarding Country X's situation is most accurate?

The current account deficit will lead to a depreciation of Country X's currency only if the capital account does not offset this deficit.

The influx of foreign capital will automatically resolve the current account deficit by increasing the demand for domestic goods.

The central bank's open market operations will have no impact on the capital account balance.

Hint

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