Question : Assertion: An increase in interest rates can attract foreign capital inflows.
Reason: Higher interest rates provide higher returns on investments, attracting foreign investors.
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 provide a correct explanation.
The Assertion states that an increase in interest rates can attract foreign capital inflows, which is true. When a country's interest rates rise, it can make the country's assets, such as government bonds or deposits, more attractive to foreign investors seeking higher returns. This can lead to an inflow of foreign capital into the country.
The Reason states that higher interest rates provide higher returns on investments, attracting foreign investors, which is also true. When interest rates are higher, investors can earn a greater return on their investments, and this can incentivize foreign investors to move their capital into the country with higher interest rates
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: 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.
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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