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.
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 offset a deficit in the current account, which is true. The capital account represents transactions involving the acquisition or disposal of non-financial assets and financial assets between residents and non-residents. When there is a surplus in the capital account, it means that there is a net inflow of capital into the country, which can help finance the current account deficit.
The Reason states that a surplus in the capital account implies higher capital inflows, which can finance the current account deficit, which is also true. Higher capital inflows can help bridge the gap between the inflows and outflows in the current account, reducing the overall deficit.
Therefore, Both Assertion and Reason are true and provide a correct explanation.
