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Unformatted text preview: Potential problems in financing a current account deficit: Countries cannot always rely on inflows of capital to finance a current account deficit. Foreign investors may eventually take fright, lose confidence and take their money out. Downward pressure on the exchange rate: A large deficit in trade can lead to a fall in the exchange rate. This would then cause imported inflation and might lead to a rise in interest rates from the central bank. A declining currency would help stimulate exports but the rise in inflation and interest rates would hit demand, output and employment (iii) (iv) (v)...
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- Spring '11