Question : Assertion: A surplus in the current account leads to an increase in foreign exchange reserves.
Reason: Surplus in the current account implies that the inflow of foreign exchange exceeds the outflow.
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 correct explanation.
A surplus in the current account means that the inflow of foreign exchange (from exports, income received from abroad, etc.) exceeds the outflow (such as imports, income paid to foreign entities, etc.). This surplus leads to an accumulation of foreign exchange reserves, as the country receives more foreign currency than it spends.
The Reason provided is a correct explanation for why a surplus in the current account leads to an increase in foreign exchange reserves. The inflow of foreign exchange exceeding the outflow results in a positive balance, which contributes to the accumulation of foreign exchange reserves by the country.
Therefore, both the Assertion and Reason are true, and the Reason provides a correct explanation for the Assertion.
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 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.
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: An increase in foreign borrowing can result in an unfavorable balance of payments.
Reason: Foreign borrowing increases the outflow of funds and can contribute to a deficit in the current account.
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