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.
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: Appreciation and Revaluation of Domestic Currency with respect to foreign currency are one and the same thing.
Reason: Appreciation and Revaluation of domestic currency make the domestic goods relatively expensive. As a result, decrease in exports and
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: Devaluation of Domestic currency refers to rise in National Income of domestic country.
Reason: Devaluation of Domestic currency refers to reduction in the value of domestic currency with respect to foreign currency, under fixed exchange rate system.
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.
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