Question : Assertion: An increase in import payments leads to an unfavorable balance of payments. Reason: Higher import payments 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 Assertion and Reason are true and correct explanation.
An increase in import payments refers to higher expenses incurred by a country for purchasing goods and services from foreign countries. This increase contributes to a deficit in the current account, which is the part of the balance of payments that records transactions related to trade in goods and services.
The Reason provided is a correct explanation for how an increase in import payments leads to an unfavorable balance of payments. When a country's import payments increase, it means there is a higher outflow of foreign exchange due to the payment for imports. This higher outflow contributes to a deficit in the current account and leads to an unfavorable balance of payments.
Therefore, both the Assertion and Reason are true, and the Reason provides a correct explanation for the Assertion.
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.
Question : Assertion: An increase in export earnings leads to a favorable balance of payments.
Reason: Higher export earnings contribute to a surplus in the current account.
Question : Assertion: A decrease in tourism receipts can lead to an unfavorable balance of payments.
Reason: Tourism receipts are considered as invisible exports 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: 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.
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