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.
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 Assertion and Reason are true and provide a correct explanation.
The Assertion states that a deficit in the current account can put pressure on the domestic currency to depreciate, which is true. When a country has a current account deficit, it means that it is importing more goods and services than it is exporting, resulting in more of its currency leaving the country to pay for imports. This increased supply of the domestic currency in the foreign exchange market can lead to its depreciation.
The Reason states that a current account deficit means more foreign currency is leaving the country, reducing its value, which is also true. When a country has a current account deficit, it needs to sell its currency in exchange for foreign currencies to pay for its imports. This increased supply of the domestic currency in the foreign exchange market can cause its value to decline.
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 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.
Question : Assertion: A surplus in the capital account can lead to an appreciation of the domestic currency.
Reason: Higher capital inflows increase the demand for the domestic currency, strengthening its value.
Question : Assertion: An increase in the outflow of dividends to foreign investors reduces the current account balance.
Reason: Dividend outflows are considered as invisible imports and contribute to 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.
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