1. is true as an identity only if aggregate demand for domestic output equals aggregate supply.
2. is true as an equilibrium condition only if all transactions are autonomous.
3. is true both as an accounting identity and an equilibrium condition.
4. is true for all three conditions stated above.
Choose the correct option.
The correct option is option 3. The equality of the net capital outflow and the current account surplus can be treated as the equality of desired magnitudes, in which case it is an equilibrium condition. Or it can be treated as the equality of observed magnitudes, in which case that equality is guaranteed by the principles of double-entry bookkeeping. Even if equilibrium did not hold, the observed net capital outflow on the books would be identical to the observed current account surplus. Option 1 is clearly nonsense. Option 2 is a wrong choice because both autonomous and induced transactions enter into the desired net capital flow.
Again we have to emphasize that all private and government transactions are part of aggregate demand and supply whether or not they are motivated by a desire of the government to manipulate the exchange rate. The desired net capital inflow thus incorporates both autonomous and induced transactions.
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