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.
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 investment inflows can result in a deficit in the capital account.
Reason: Foreign investment inflows contribute to the capital account surplus.
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 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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