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.
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 incorrect explanation
Solution : The correct answer is (a) Both Assertion and Reason are true and incorrect explanation.
The Assertion is true. A decrease in foreign aid can indeed contribute to a deficit in the current account. Foreign aid represents an inflow of funds from abroad, and a decrease in foreign aid means there is less funding coming into the country, which can result in a deficit in the current account.
However, the Reason is incorrect. While foreign aid inflows are considered as transfers, they do not directly contribute to the current account surplus. Transfers are recorded separately in the balance of payments and include items such as remittances, grants, and foreign aid. They do not involve the exchange of goods or services and do not directly impact the current account balance, which primarily consists of trade in goods and services.
Therefore, Both Assertion and Reason are true and incorrect explanation.
