Balance of Payments Equilibrium Matching

This solution identifies the correct pairings between the policies listed in List-I and their corresponding descriptions or effects on the Balance of Payments (BOP) equilibrium in List-II.

Matching List – I with List – II:

• a. Exchange control is correctly matched with i. Exporters surrender foreign exchange to the central bank.
• b. Trade Policy Measure is correctly matched with iv. Enhancing exports by granting subsidies.
• c. Expenditure reducing policy is correctly matched with ii. Bank rate raised by the central bank.
• d. Expenditure switching policy is correctly matched with iii. Reduction in foreign exchange rate.

Explanation of Matches:

• a. Exchange control (i): This involves direct intervention in foreign exchange markets. Requiring exporters to surrender their foreign earnings to the central bank is a form of controlling foreign exchange supply.
• b. Trade Policy Measure (iv): Subsidies are a tool used in trade policy to make domestic goods more competitive internationally, thereby aiming to improve the balance of trade.
• c. Expenditure reducing policy (ii): Raising the bank rate is a contractionary monetary policy. It increases borrowing costs, dampens investment and consumption, leading to reduced overall domestic expenditure and lower import demand.
• d. Expenditure switching policy (iii): A reduction in the foreign exchange rate (currency depreciation) makes exports cheaper for foreign buyers and imports more expensive for domestic buyers. This encourages spending to shift from foreign goods to domestic goods.