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.
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 surplus in the capital account can lead to an appreciation of the domestic currency, which is true. When there is a surplus in the capital account, it means that capital is flowing into the country, increasing the demand for the domestic currency. This increased demand can lead to an appreciation of the currency's value.
The Reason states that higher capital inflows increase the demand for the domestic currency, strengthening its value, which is also true. When there are higher capital inflows, such as foreign investment or portfolio investment, it creates a demand for the domestic currency, and this increased demand can lead to an appreciation.
Therefore, Both Assertion and Reason are true and provide a correct explanation.
