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Answer

Correct Option is Only 3

Impact of current account deficit The impact of the current account deficit depends upon the manner in which this deficit is financed. If it is financed through loans and borrowings from foreign countries, it becomes unsustainable in the long run because large borrowings ultimately leads to high interest payments in the future. The financing of CAD through hot money such as foreign Institutional Investment (FII) is also risky as when the confidence of market falls, the hot money flows out quickly leading to rapid depreciation of currency as happened during the East Asian crisis. Running CAD means the claims of foreigners are increasing in the countries assets which could be redeemed by them at any point of time. However, the impact of CAD may not be necessarily negative as CAD during the period of inward investment through FDI can create jobs and growth in the economy. This improves the health of the country's economy and the country will be able to pay its debts back.

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