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In the context of economy, which of the following best describes the term "official reserve sale"?
- a)It is the sale of foreign exchange by the reserve bank when there is a deficit in its balance of payments.
- b)It is the sale of government stakes in public sector units for the process of disinvestment.
- c)It is the printing of currency by the reserve bank for financing the fiscal deficit.
- d)It is the sale of government securities by the RBI.
Correct answer is option 'A'. Can you explain this answer?
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In the context of economy, which of the following best describes the t...
- Balance of Payments Surplus and Deficit
- The essence of international payments is that just like an individual who spends more than her income must finance the difference by selling assets or by borrowing, a country that has a deficit in its current account (spending more than it receives from sales to the rest of the world) must finance it by selling assets or by borrowing abroad. Thus, any current account deficit must be financed by a capital account surplus, a net capital inflow.
- In this case, in which a country is said to be in balance of payments equilibrium, the current account deficit is financed entirely by international lending without any reserve movements.
- Alternatively, the country could use its reserves of foreign exchange in order to balance any deficit in its balance of payments. The reserve bank sells foreign exchange when there is a deficit. This is called an official reserve sale. Hence option (a) is the correct answer.
- The decrease (increase) in official reserves is called the overall balance of payments deficit (surplus). The basic premise is that the monetary authorities are the ultimate financiers of any deficit in the balance of payments (or the recipients of any surplus).
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In the context of economy, which of the following best describes the t...
Understanding Official Reserve Sale
An "official reserve sale" primarily occurs when a country's central bank, such as the Reserve Bank of India (RBI), intervenes in the foreign exchange market. This intervention is often necessary to stabilize the national currency and manage balance of payments issues.
Key Points about Official Reserve Sale:
- Deficit Management:
An official reserve sale is initiated when there is a deficit in the balance of payments. The central bank sells off its foreign currency reserves to support the domestic currency and rectify the imbalance in payments.
- Foreign Exchange Reserves:
These reserves are crucial for a country as they provide a buffer against economic shocks, ensure the ability to pay for imports, and maintain investor confidence.
- Market Interventions:
By selling foreign currency, the central bank can increase the supply of its own currency in the market, which can help to stabilize or even strengthen the domestic currency against foreign currencies.
- Impact on Exchange Rates:
The sale can influence exchange rates significantly. If a central bank sells foreign reserves, it may lead to a temporary appreciation of the domestic currency, which can impact trade balances.
Conclusion:
In summary, an official reserve sale is a strategic action taken by a reserve bank to manage balance of payments issues, stabilize the domestic economy, and maintain currency value. This makes option 'A' the correct description of an official reserve sale in the context of economic activity.
An "official reserve sale" primarily occurs when a country's central bank, such as the Reserve Bank of India (RBI), intervenes in the foreign exchange market. This intervention is often necessary to stabilize the national currency and manage balance of payments issues.
Key Points about Official Reserve Sale:
- Deficit Management:
An official reserve sale is initiated when there is a deficit in the balance of payments. The central bank sells off its foreign currency reserves to support the domestic currency and rectify the imbalance in payments.
- Foreign Exchange Reserves:
These reserves are crucial for a country as they provide a buffer against economic shocks, ensure the ability to pay for imports, and maintain investor confidence.
- Market Interventions:
By selling foreign currency, the central bank can increase the supply of its own currency in the market, which can help to stabilize or even strengthen the domestic currency against foreign currencies.
- Impact on Exchange Rates:
The sale can influence exchange rates significantly. If a central bank sells foreign reserves, it may lead to a temporary appreciation of the domestic currency, which can impact trade balances.
Conclusion:
In summary, an official reserve sale is a strategic action taken by a reserve bank to manage balance of payments issues, stabilize the domestic economy, and maintain currency value. This makes option 'A' the correct description of an official reserve sale in the context of economic activity.
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In the context of economy, which of the following best describes the term "official reserve sale"?a)It is the sale of foreign exchange by the reserve bank when there is a deficit in its balance of payments.b)It is the sale of government stakes in public sector units for the process of disinvestment.c)It is the printing of currency by the reserve bank for financing the fiscal deficit.d)It is the sale of government securities by the RBI.Correct answer is option 'A'. Can you explain this answer?
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In the context of economy, which of the following best describes the term "official reserve sale"?a)It is the sale of foreign exchange by the reserve bank when there is a deficit in its balance of payments.b)It is the sale of government stakes in public sector units for the process of disinvestment.c)It is the printing of currency by the reserve bank for financing the fiscal deficit.d)It is the sale of government securities by the RBI.Correct answer is option 'A'. Can you explain this answer? for UPSC 2025 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about In the context of economy, which of the following best describes the term "official reserve sale"?a)It is the sale of foreign exchange by the reserve bank when there is a deficit in its balance of payments.b)It is the sale of government stakes in public sector units for the process of disinvestment.c)It is the printing of currency by the reserve bank for financing the fiscal deficit.d)It is the sale of government securities by the RBI.Correct answer is option 'A'. Can you explain this answer? covers all topics & solutions for UPSC 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for In the context of economy, which of the following best describes the term "official reserve sale"?a)It is the sale of foreign exchange by the reserve bank when there is a deficit in its balance of payments.b)It is the sale of government stakes in public sector units for the process of disinvestment.c)It is the printing of currency by the reserve bank for financing the fiscal deficit.d)It is the sale of government securities by the RBI.Correct answer is option 'A'. Can you explain this answer?.
In the context of economy, which of the following best describes the term "official reserve sale"?a)It is the sale of foreign exchange by the reserve bank when there is a deficit in its balance of payments.b)It is the sale of government stakes in public sector units for the process of disinvestment.c)It is the printing of currency by the reserve bank for financing the fiscal deficit.d)It is the sale of government securities by the RBI.Correct answer is option 'A'. Can you explain this answer? for UPSC 2025 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about In the context of economy, which of the following best describes the term "official reserve sale"?a)It is the sale of foreign exchange by the reserve bank when there is a deficit in its balance of payments.b)It is the sale of government stakes in public sector units for the process of disinvestment.c)It is the printing of currency by the reserve bank for financing the fiscal deficit.d)It is the sale of government securities by the RBI.Correct answer is option 'A'. Can you explain this answer? covers all topics & solutions for UPSC 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for In the context of economy, which of the following best describes the term "official reserve sale"?a)It is the sale of foreign exchange by the reserve bank when there is a deficit in its balance of payments.b)It is the sale of government stakes in public sector units for the process of disinvestment.c)It is the printing of currency by the reserve bank for financing the fiscal deficit.d)It is the sale of government securities by the RBI.Correct answer is option 'A'. Can you explain this answer?.
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