A _ _ _ _ _ _ _ _ account deficit is financed by net capital flows from the rest of the world, thus by a capital account surplus.

Current

The correct answer is option (2) : Current

1. The current account includes the balance of trade (exports and imports of goods and services), net income from abroad, and net transfers ( like foreign aid). When the value of imports exceeds exports and when there's a net outflow of income and transfers, it leads to a current account deficit.

2. To finance a current account deficit, a country may attract capital from the rest of the world. This capital includes foreign investment, loans, or other financial inflows. These capital flows are recorded in the capital account.

"The essence of international payments is that just like an individual who spends more than her income must finance the difference by selling assets or by borrowing, a country that has a deficit in its current account (spending more than it receives from sales to the rest of the world) must finance it by selling assets or by borrowing abroad.

Thus, any current account deficit must be financed by a capital account surplus, that is, a net capital inflow.

Current account + Capital account = 0 "