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.
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 an increase in foreign borrowing can result in an unfavorable balance of payments, which is true. When a country borrows from foreign sources, it increases its external debt and leads to an outflow of funds. This outflow can contribute to a deficit in the current account, as it represents an increase in liabilities to foreign lenders.
The Reason states that foreign borrowing increases the outflow of funds and can contribute to a deficit in the current account, which is also true. When a country borrows from foreign sources, it typically needs to make interest and principal payments to repay the debt. These payments represent an outflow of funds and can contribute to a deficit in the current account.
Therefore, Both Assertion and Reason are true and provide a correct explanation.
