Assertion (A) : Capital Account convertibility is introduced only sometime after the introduction of convertibility on current account when exchange rate of currency of a country is relatively stable. Reasoning (R) : Capital Account convertibility is necessary for faster growth and development of economy and it makes foreign exchange rate more stable. Codes :
Assertion (A) Analysis
Assertion (A) states that Capital Account Convertibility (CAC) is introduced after Current Account Convertibility and when the exchange rate is relatively stable. This aligns with standard economic policy progression. Countries typically liberalize the current account first, ensuring smooth trade-related foreign exchange transactions. Subsequently, when the economy demonstrates exchange rate stability, capital account transactions (like investments and loans) are gradually liberalized to avoid excessive currency fluctuations.
Therefore, Assertion (A) is correct.
Reasoning (R) Analysis
Reasoning (R) suggests that CAC is necessary for faster economic growth and improves exchange rate stability. While CAC can facilitate foreign investment and potentially boost economic growth, the claim that it inherently makes the foreign exchange rate *more stable* is questionable.
Capital flows, especially short-term ones, associated with CAC can often lead to increased exchange rate volatility, particularly if not managed effectively. Exchange rate stability is often considered a prerequisite for introducing CAC, rather than a guaranteed outcome of it. Hence, the latter part of the reasoning is incorrect.
Therefore, Reasoning (R) is incorrect.
Conclusion on Correctness
Based on the analysis, Assertion (A) is correct, and Reasoning (R) is incorrect.
This corresponds to Option 1.
Important Questions from Balance of payments (BOP)
The Balance of Payment Account of an economy is related to the ________.
Which of the following statements is INCORRECT?
Balance of Trade is measured as:
Indicate the correct code of the following statements being correct or incorrect. The statements relate to the type of transactions recorded in the current/capital accounts of the Balance of Payments.
Statement (I): The capital account consists of long-term capital transactions only.
Statement (II): The current account includes all transactions which give rise to or use up national income.
The items on the capital account of Balance of Payments are:
