Economics - Reading 10 - BB 11

CFA Level III Economics
#1

Any help, thank you. I cant remember current account and capital account stuff that well. We’re given in text:

(X - M) = (S - I) + (T - G).

BB 11 asks what impact of a tax cut on capital and current account balances?

For current account they say a larger deficit due to larger government deficit (T - G smaller) and tax cut will lead to larger domestic investments (S - I smaller).

For capital accounts they say larger surplus due to selling assets abroad (X - M larger).

Is the left side of equation related to capital accounts and right side to current accounts? Is that all it is? Textbook says nothing about what is related to capital accounts and what to current. I want to be sure if on exam it comes up, I write about the correct thing.

Thanks

#2

As a disclaimer I am not an L3 candidate, so I don’t know what the curriculum says.

But I do have an MSc in Economics, and theoretically the current and capital accounts should be mirror images. So if tax cuts are leading to a larger deficit on the current account then it must be financed by a larger surplus on the capital account.

#3

Also confused by this formula and how to use it in answering BB 11.