Question : A country's balance of payments can be in equilibrium when:

Option 1: Its exports equal its imports

Option 2: Its capital inflows equal its capital outflows

Option 3: Its current account balance is zero

Option 4: All of the above

Correct Answer: All of the above

Solution : The correct answer is (d) All of the above.

A country's balance of payments can be in equilibrium when all of the following conditions are met:

a) Its exports equal its imports: This refers to the balance of trade, where the value of goods and services exported by the country is equal to the value of goods and services imported.

b) Its capital inflows equal its capital outflows: This refers to the balance of capital and financial flows, where the inflow of capital into the country from foreign sources, such as investments and loans, is equal to the outflow of capital from the country to foreign destinations.

c) Its current account balance is zero: The current account balance, which includes trade in goods and services, income flows, and unilateral transfers, is the sum of the trade balance, net income from abroad, and net unilateral transfers. When the current account balance is zero, it means that the country is neither a net borrower nor a net lender with the rest of the world.

When all of these conditions are met, it indicates that the country's receipts from its exports and capital inflows are sufficient to cover its payments for imports and capital outflows, resulting in a balanced position in the balance of payments.

Therefore, the correct answer is d) All of the above.