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.
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 a decrease in foreign investment inflows can result in a deficit in the capital account, which is true. When there is a decrease in foreign investment inflows, it means there is a reduction in the funds coming into the country for investment purposes, which can contribute to a deficit in the capital account.
The Reason states that foreign investment inflows contribute to the capital account surplus, which is also true. Foreign investment inflows are recorded as credits in the capital account, and if they exceed the outflows of investment funds, it can contribute to a surplus in the capital account.
Therefore, Both Assertion and Reason are true and provide a correct explanation.
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: 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 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.
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.
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