Question : Assertion: A current account deficit can be compensated by a surplus in the capital account.
Reason: Surplus in the capital account can help finance the deficit in the current account.
Option 1: Both Assertion and Reason are true and correct explanation
Option 2: Both Assertion and Reason are true and incorrect explanation
Option 3: Assertion is true but Reason is false
Option 4: Assertion is false but Reason is true
Correct Answer: Both Assertion and Reason are true and correct explanation
Solution : The correct answer is (a) Both the Assertion and the Reason are true and provide a correct explanation.
The Assertion states that a current account deficit can be compensated by a surplus in the capital account, which is true. When a country has a current account deficit, it means that its imports exceed its exports, resulting in a net outflow of funds. This deficit can be offset by a surplus in the capital account, which represents inflows of funds from foreign sources such as foreign direct investment, portfolio investment, or borrowing. The surplus in the capital account can help finance the deficit in the current account.
The Reason states that a surplus in the capital account can help finance the deficit in the current account, which is also true and supports the Assertion. The surplus in the capital account represents inflows of funds that can be used to finance the current account deficit, helping to cover the shortfall in the balance of payments.
Therefore, Both Assertion and Reason are true and provide a correct explanation.
Question : Assertion: A surplus in the capital account can offset a deficit in the current account.
Reason: Surplus in the capital account implies higher capital inflows, which can finance the current account deficit.
Question : Assertion: A decrease in foreign aid can contribute to a deficit in the current account.
Reason: Foreign aid inflows are considered as transfers and contribute to the current account surplus.
Question : Assertion: A decrease in foreign investment inflows can result in a deficit in the capital account.
Reason: Foreign investment inflows contribute to the capital account surplus.
Question : Assertion: A deficit in the current account can put pressure on the domestic currency to depreciate.
Reason: A current account deficit means more foreign currency is leaving the country, reducing its value.
Question : Assertion: A surplus in the current account leads to an increase in foreign exchange reserves.
Reason: Surplus in the current account implies that the inflow of foreign exchange exceeds the outflow.
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