Assertion & Reason Type Questions: Open Economy Macrcoeconomics

Q1: Directions: In the following questions, a statement of assertion (A) is followed by a statement of reason (R). Mark the correct choice as:

Assertion (A): Autonomous items cause movements of goods and services across the borders.

Reason (R): Accommodating items to clear the deficit or surplus in the Balance of Payment.

(a) Both assertion (A) and reason (R) are true and reason (R) is the correct explanation of assertion (A).

(b) Both assertion (A) and reason (R) are true but reason (R) is not the correct explanation of assertion (A).

(c) Assertion (A) is true but reason (R) is false.

(d) Assertion (A) is false but reason (R) is true.

Ans: b

Sol: Autonomous items refers to those Balance of Payment (BOP) transactions which are undertaken for profit.

Q2: Directions: In the following questions, a statement of assertion (A) is followed by a statement of reason (R). Mark the correct choice as:

Assertion (A): Import of machinery is reflected in the current account of balance of payments.

Reason (R): Export and import of goods and invisibles are recorded in the current account of balance of payments.

(a) Both assertion (A) and reason (R) are true and reason (R) is the correct explanation of assertion (A).

(b) Both assertion (A) and reason (R) are true but reason (R) is not the correct explanation of assertion (A).

(c) Assertion (A) is true but reason (R) is false.

(d) Assertion (A) is false but reason (R) is true.

Ans: a

Sol: Export and import of all goods including machines are recorded in the current account.Note: There is a third category (besides current account and capital account) called official reserve account which records transactions of the central bank in a BOP statement. These transactions are called accommodating or 'beloiv the line' transactions. It relates to running down its reserves of foreign exchange by selling foreign currency in foreign exchange market in case of a deficit. The decrease (or increase) in official reserves is called the overall balance of payments deficit (or surplus).

Q3: Directions: In the following questions, a statement of assertion (A) is followed by a statement of reason (R). Mark the correct choice as:

Assertion (A): Current account is a part of Balance of Trade.

Reason (R): Current account records exports and imports of goods and services and transfer payments.

(a) Both assertion (A) and reason (R) are true and reason (R) is the correct explanation of assertion (A).

(b) Both assertion (A) and reason (R) are true but reason (R) is not the correct explanation of assertion (A).

(c) Assertion (A) is true but reason (R) is false.

(d) Assertion (A) is false but reason (R) is true.

Ans: d

Sol: Balance of Trade is a part of the current account.Balance on Current Account=Trade balance + Invisibles balance

Q4: Directions: In the following questions, a statement of assertion (A) is followed by a statement of reason (R). Mark the correct choice as:

Assertion (A): The level of aggregate demand tends to rise.

Reason (R): Exports are more than imports.

(a) Both assertion (A) and reason (R) are true and reason (R) is the correct explanation of assertion (A).

(b) Both assertion (A) and reason (R) are true but reason (R) is not the correct explanation of assertion (A).

(c) Assertion (A) is true but reason (R) is false.

(d) Assertion (A) is false but reason (R) is true.

Ans: a

Sol: Aggregate demand is based on four components. These are: consumption, investment, government spending and net exports. Exports lead to a rise in AD.

Q5: Directions: In the following questions, a statement of assertion (A) is followed by a statement of reason (R). Mark the correct choice as:

Assertion (A): In case of currency appreciation, less rupees are to be paid to buy one US dollar.

Reason (R): Currency appreciation leads to increase in value of domestic currency in reference to foreign currency. So, less is needed to pay for the same amount.

(a) Both assertion (A) and reason (R) are true and reason (R) is the correct explanation of assertion (A).

(b) Both assertion (A) and reason (R) are true but reason (R) is not the correct explanation of assertion (A).

(c) Assertion (A) is true but reason (R) is false.

(d) Assertion (A) is false but reason (R) is true.

Ans: a

Sol: Export of goods and services from India to the US would mean inflow of foreign exchange to India.

Q6: Directions: In the following questions, a statement of assertion (A) is followed by a statement of reason (R). Mark the correct choice as:

Assertion (A): Export of goods and services from India to the US would mean outflow of foreign exchange from India.

Reason (R): Foreign exchange in terms of receipts for exports flows from the US to India.

(a) Both assertion (A) and reason (R) are true and reason (R) is the correct explanation of assertion (A).

(b) Both assertion (A) and reason (R) are true but reason (R) is not the correct explanation of assertion (A).

(c) Assertion (A) is true but reason (R) is false.

(d) Assertion (A) is false but reason (R) is true.

Ans: d

Sol: Export of goods and services from India to the US would mean inflow of foreign exchange to India.

Q7: Directions: In the following questions, a statement of assertion (A) is followed by a statement of reason (R). Mark the correct choice as:

Assertion (A): In order to restore the value of depreciating domestic currency, the Central Bank sells the US dollars in the international money market.

Reason (R): By selling US dollars, the supply of dollars will increase which will reduce the price of dollars.

(a) Both assertion (A) and reason (R) are true and reason (R) is the correct explanation of assertion (A).

(b) Both assertion (A) and reason (R) are true but reason (R) is not the correct explanation of assertion (A).

(c) Assertion (A) is true but reason (R) is false.

(d) Assertion (A) is false but reason (R) is true.

Ans: a

Sol: Increases in real GDP in the United States will increase the supply of dollars to foreign countries, causing the dollar to depreciate.

Q8: Directions: In the following questions, a statement of assertion (A) is followed by a statement of reason (R). Mark the correct choice as:

Assertion (A): When in order to buy 1 US dollar ₹ 80 are needed instead of ₹ 75, domestic currency shows depreciation.

Reason (R) : Depreciation of domestic currency refers to fall in the value of domestic currency in terms of foreign currency caused by rise in foreign exchange rate in the foreign exchange market.

(a) Both assertion (A) and reason (R) are true and reason (R) is the correct explanation of assertion (A).

(b) Both assertion (A) and reason (R) are true but reason (R) is not the correct explanation of assertion (A).

(c) Assertion (A) is true but reason (R) is false.

(d) Assertion (A) is false but reason (R) is true.

Ans: a

Sol: Here, domestic currency shows depreciation because more rupees are to be paid to buy one US dollar.