CHAPTER -16.

GOVERNMENT BUDGET AND THE ECONOMY

ASSERTION- REASON QUESTIONS
Question Question Content
No
Q1 Assertion (A). Borrowings by the govt. from general public, RBI and ROW are capital
receipts. Recovery of loans by govt. and sale of shares of public sector enterprises to
private sector are treated as capital receipts in govt. budget.
Reason (R). Capital receipts are those estimated receipts of the govt. during the fiscal
year which affect asset or liability status of the govt. These receipts create a
corresponding liability for the govt. or lead to reduction in assets of the govt.
Alternatives:
(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 and 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.
Q2 Assertion (A). In govt. budget production of goods which are injurious to health (like
cigarettes) is discouraged through heavy taxation and production of socially useful
goods (like khadi) is encouraged through subsidies. If private sector does not take
initiative in certain activities, govt. directly controls them like water supply, sanitation
etc.
Reason (R). The govt. seeks to allocate resources with a view to balance the goals of
profit maximization and social welfare. It is allocation function in govt. budget as govt.
attempts to provide certain goods and services which cannot be provided through the
market mechanism.
Alternatives:
(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 and 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.
Q3 Assertion (A). Recovery of loans is Capital receipt.
Reason (R). Revenue receipts of the govt. are those money receipts which do not create
a liability for the govt. and as well do not lead to reduction in assets of the govt.
Alternatives:
(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 and 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.
Q4 Assertion (A). Capital receipts often leave burden on future generations.
1|Page 8 October 2021,ZIET BHUBANESWAR
 Reason (R). Borrowings leave the burden on future generations for the repayment of
loans.
Alternatives:
(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 and 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.
Q5 Assertion (A). There are three ways of managing Revenue deficit-
(i) Borrowing from the general public, RBI or rest of the world
(ii) Disinvestment by way of selling its ownership of public enterprises.
(iii) Cut in govt. expenditure (subsidies vin particular)
Reason (R). The govt. in India has cut its expenditure on subsidies by restricting the
supply of subsidized LPG cylinders to 9 per family during a year. This might cause
hardship to people with low income. Second, the govt. resorts to borrowing from the
general public, RBI and ROW. This raises liabilities of the govt. Third, the govt.
undertakes disinvestment. This causes a reduction in its assets.
Alternatives:
(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 and 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.
Q6 Assertion (A): Fiscal deficit refers to total borrowings of government during a financial
year.
Reason (R): fiscal deficit creates burden on future generations
Alternatives:
(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 and 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.
Q7 Assertion (A): The budget is also referred to as Annual financial statement in Article 112
of the constitution.
Reason (R): budget is a statement of actual income and actual expenditure of the
government.
Alternatives:
(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 and Reason (R) is not the correct
explanation of Assertion (A)
(c) Assertion (A) is true but Reason (R) is false.

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 (d) Assertion (A) is false but Reason (R) is true.
Q8 Assertion (A): Direct tax have limited coverage.
Reason (R): direct tax do not reach all section of the economy
Alternatives:
(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 and 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.
Q9 Assertion (A): revenue receipts are those receipts which neither creates any liability nor
cause any reduction in assets of the government.
Reason (R): These receipts are regular and recurring in nature.
Alternatives:
(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 and 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.
Q10 Assertion (A): Direct tax is a type of tax where the incidence and impact of taxation fall
on same person.
Reason (R): income tax is an example of direct tax.
Alternatives:
(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 and 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.
Q11 Assertion: Fiscal deficit = total expenditure > total receipts excluding borrowings and
other liabilities of the government.
Reason: because fiscal deficit reflects the borrowing requirements of the government
Alternatives:
(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 and 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.
Q12 Assertion: Primary deficit= Fiscal deficit –Interest of payments
Reason: because primary deficit reflects the borrowing requirements of the
government other than interest payments
Alternatives:
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation

3|Page 8 October 2021,ZIET BHUBANESWAR

 of Assertion (A)
(b) Both Assertion (A) and Reason (R) are true and 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.
Q13 Assertion: Budget is prepared at centre, state and local level
Reason: State budget is known as Union budget
Alternatives:
(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 and 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.
Q14 Assertion: Disinvestment is a capital expenditure of the government
Reason: because disinvestment decreases the assets of the government
Alternatives:
(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 and 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.
Q15 Assertion: Public expenditure generates investment-friendly environment in the
economy
Reason: It raises the infrastructural development in the economy.
Alternatives:
(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 and 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.
Q16 Assertion (A): Cigarettes and Whisky are discouraged through heavy taxation.
Reason (R): These are ‘socially useful goods'
Alternatives:
(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 and 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.
Q17 Assertion (A): GST is an indirect tax.
Reason (R): because it is imposed on goods and services.
Alternatives:

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 (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 and 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.
Q18 Assertion (A): borrowings are capital receipts but payment of interest on borrowings
are revenue expenditure.
Reason (R): borrowings creates liability but payment of interest does not reduce
liability.
Alternatives:
(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 and 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.
Q19 ASSERTION (A): Fiscal deficit is greater than budgetary deficit.
REASON(R): Fiscal deficit is the borrowing from the RBI of India plus other liabilities of
the government to meet its expenditure.
Alternatives:
(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 and 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.
Q20 ASSERTION (A): Fiscal deficit compels the government to issue new currency to finance
its borrowings.
REASON(R): Borrowings are always inflationary in nature.
Alternatives:
(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 and 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.
Q21 ASSERTION (A): Indirect tax is good source of revenue for the government.
REASON(R): The final consumer bear the entire burden as the impact and incident of
Indirect tax falls on him.
Alternatives:
(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 and Reason (R) is not the correct
explanation of Assertion (A)

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 (c) Assertion (A) is true but Reason (R) is false.
(d) Assertion (A) is false but Reason (R) is true.
Q22 ASSERTION (A): Fiscal deficit shows a better position of the government expenditure in
comparison to the budget deficit.
REASON(R): Fiscal deficit means the borrowing of the government.
Alternatives:
(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 and 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.
Q23 ASSERTION (A): Deficit budget is a good strategy to deals with economic slowdown.
REASON(R): Deficit budget raise the aggregate demand of the economy.
Alternatives:
(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 and 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.

ANSWER

Question No Answer
Q1 (a) Both Assertion (A) and Reason (R) are true and Reason (R) is
the correct explanation of Assertion (A )
Q2 (a) Both Assertion (A) and Reason (R) are true and Reason (R) is
the correct explanation of Assertion (A)
Q3 (b) Both Assertion (A) and Reason (R) are true and Reason (R) is
not the correct explanation of Assertion (A)
Q4 (a) Both Assertion (A) and Reason (R) are true and Reason (R)
is the correct explanation of Assertion (A)
Q5 (a) Both Assertion (A) and Reason (R) are true and Reason (R) is
the correct explanation of Assertion (A)
Q6 (a) Both Assertion (A) and Reason (R) are true and Reason (R) is
the correct explanation of Assertion (A)
Q7 (c) Assertion (A) is true but Reason (R) is false.
Q8 (a) Both Assertion (A) and Reason (R) are true and Reason (R) is
the correct explanation of Assertion (A)
Q9 (a) Both Assertion (A) and Reason (R) are true and Reason (R) is
6|Page 8 October 2021,ZIET BHUBANESWAR
 the correct explanation of Assertion (A)
Q10 (a) Both Assertion (A) and Reason (R) are true and Reason (R) is
the correct explanation of Assertion (A)
Q11 (a) Both Assertion (A) and Reason (R) are true and Reason (R) is
the correct explanation of Assertion (A)
Q12 (a) Both Assertion (A) and Reason (R) are true and Reason (R) is
the correct explanation of Assertion (A)
Q13 (c) Assertion (A) is true but Reason (R) is false.
Q14 (d) Assertion (A) is false but Reason (R) is true.
Q15 (a) Both Assertion (A) and Reason (R) are true and Reason (R) is
the correct explanation of Assertion (A)
Q16 (c) Assertion (A) is true but Reason (R) is false.
Q17 (a) Both Assertion (A) and Reason (R) are true and Reason (R) is
the correct explanation of Assertion (A)
Q18 (a) Both Assertion (A) and Reason (R) are true and Reason (R) is
the correct explanation of Assertion (A)
Q19 (d) Assertion (A) is false but Reason (R) is true.
Q20 (a) Both Assertion (A) and Reason (R) are true and Reason (R) is
the correct explanation of Assertion (A)
Q21 (b) Both Assertion (A) and Reason (R) are true and Reason (R) is
not the correct explanation of Assertion (A)
Q22 (a) Both Assertion (A) and Reason (R) are true and Reason (R) is
the correct explanation of Assertion (A)
Q23 (a) Both Assertion (A) and Reason (R) are true and Reason (R) is
the correct explanation of Assertion (A)

PREPIRED BY : PGT ECONOMICS OF BHUBANESWAR, GUWAHATI,

KOLKATA, RANCHI, SILCHAR AND TINSIKIA REGION.
VETTED BY : SILCHAR REGION

7|Page 8 October 2021,ZIET BHUBANESWAR

 CHAPTER -17-BALANCE OF PAYMENTS ACCOUNT
ASSERTION- REASON QUESTIONS

Sl. Question
No.
1 Assertion (A): A country always tries to balance the BOP i.e., balance in current account
equals to balance in capital account.
Reason (R): Balanced BOP indicates stable economic relation with rest of the world.
(A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of
assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true.
2 Assertion (A): Accommodating items of trade are undertaken to maintain the balance in
the BOP account.
Reason (R): Accommodating items are net consequences of autonomous transactions that
are undertaken to correct disequilibrium in autonomous items of BOP.
(A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of
assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true

3 Assertion (A): Purchase of second-hand machinery from abroad is not recorded in balance
of payment.
Reason (R): Sale and purchase of second-hand goods from abroad are not included in the
estimation of national income.
(A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of
assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true
4 Assertion (A): Increased lending abroad are recorded on the debit side of the capital
account.
Reason (R): Lending affect the assets and liabilities of the economy and involves outflow
of income.
(A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of
assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true
5 Assertion (A): All transactions recorded in Balance of Payment are autonomous
transactions.
Reason (R): Autonomous transactions are recorded in both current and capital account of
BoP.

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 (A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of
assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true
6 Assertion:Whenthereisatradedeficitandcurrentaccountdeficit,therewillalwaysbeBoPdeficit.
Reason:Whenthereisatradedeficitandcurrentaccountdeficitbutacapitalaccountsurplus(i.e.,netc
apital inflow),theremaybeBalancedBoPorBoPsurplus.
(A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of
assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true
7 Assertion(A).Differencebetweenvalueofexportsandimportsofgoodsandservicesiscalledtrade
balance.
Reason(R),Tradebalanceisthedifferencebetweenvalueofexportsofgoodsandimportsofgoodsonl
y. Itdoesnotincludeexportsandimportsofservices.
(A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of
assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true
8 Assertion(A):Inbalanceofpayments,repaymentofloansbyIndianGovernmenttoUSGovernme
ntwillberecordedonthecreditsideofcurrentaccounts.
Reason(R):RepaymentofloansbyIndian
governmenttoUSGovernmentwillberecordedinthecapitalaccountonthedebitsideasitwillleadtoo
utflowofforeignexchange.
(A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of
assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true
9 Assertion(A):Profitsreceivedfrominvestmentsabroadisrecordedincapital Account.
Reason(R):Profitsreceivedfrominvestmentsabroadisrecordedinthecurrentaccountsinceitisani
nvestmentincome (factor income), It will be recorded on the credit side of the current
account since it leads to inflow offoreignexchange
(A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of
assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true
10 Assertion(A):Importofmachinesisrecordedincurrentaccount.
Reason(R):Allimportsandexportsofgoodsarerecordedinthecurrentaccount.
Readthefollowingstatements-
Assertion(A)andReason(R),andselectthecorrectalternativeineachcase.

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 (A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of
assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true
11 Assertion (A): Current account is in excess of balance of payments.
Reason( R ): Receipts on current account are more than payments on current account.
(A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of
assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true
12 Assertion (A): Current account of balance of payments is balanced.
Reason (R): Receipts in the current account are equal to payments in the current account.
(A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of
assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true
13 Assertion (A): Capital account is in equilibrium when capital inflows are equal to capital
outflows.
Reason (R): Excess of capital account occurs when capital inflows are less than capital
outflows.
(A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of
assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true
14 Assertion (A) : Alternatively, a country cannot use its foreign exchange funds to balance
its balance of payments deficit.
Reason (R ) Current account deficit of balance of payments is not adjusted against capital
account surplus.
(A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of
assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true
15 Assertion (A): Current account is a statement of transfer payments in the trade of goods
and services.
Reason (R): Capital account is a statement of all international transactions of assets.
(A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of
assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true
16 Assertion (A): 'Indians Investing in assets abroad will be recorded under debit side of

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 capital account in Balance of Payments.’
Reason (R): Indians investing in assets abroad will lead to an outflow of foreign currency;
it will be recorded under debit side of capital account in 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) false.
(D) Assertion (A) is false but Reason (R) is true.
17 Assertion (A): A country with trade deficit cannot have current account surplus in its
Balance of Payments.
Reason (R): Trade deficit occurs when value of goods / visible imported is more than the
value of goods / visible exported. Current Account Surplus in this situation will arise when
the deficit on trade account is less than the surplus on account of invisibles.
(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) false.
(D) Assertion (A) is false but Reason (R) is true.
18 Assertion (A): Trade deficit is always a great cause of worry for an economy,
Reason (R): Trade deficit is a lesser cause of worry if it reflects a rise in investment which
will build the capital stock and increase the future output in an economy.
(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) false.
(D) Assertion (A) is false but Reason (R) is true.
19 Assertion (A): 'Make in India' Programme will have favourable effect on Balance of
Payments position of India.
Reason (B): 'Make in India' will increase supply (inflow) of foreign exchange in India,
causing improvement in the balance of payment position.
(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) false.
(D) Assertion (A) is false but Reason (R) is true.
20 Assertion (A): ‘Import of Pulses’ will have favourable effect on Balance of Payments
position of India.
Reason (R): Import of pulses will lead to outflow of foreign exchange from the country,
causing adverse effect on balance of payment position.
(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

4|Page8 October 2021,ZIET BHUBANESWAR

 explanation of Assertion (A)
(C) Assertion (A) is true but Reason (R) false.
(D) Assertion (A) is false but Reason (R) is true.
21 Assertion A: Accommodating transactions are undertaken to make equilibrium in BOP
account.
Reason R: Accommodating items are also called above the line items.
(A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of
assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true.

22 Assertion A: ‘Borrowings from abroad’ is recorded in the credit side of capital account of
the balance of payments account.
Reason R: ‘Borrowings from abroad’ leads to the receipts of foreign exchange from rest of
the world.
(A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of
assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true.

23 Assertion A: Balance of Trade refers to difference between the amount of exports and
imports of visible items (goods).
Reason R: Balance of Trade is a wider concept as it includes the amount of exports and
imports of visible items.
(A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of
assertion.
(C) Assertion is true, reason is false.
(D) d) Assertion is false, reason is true
24 Assertion (A): 'Make in India' Programme will have favourable effect on Balance of
Payments position of India.
Reason (R): 'Make in India' will increase supply (inflow) of foreign exchange in India,
causing improvement in the balance of payment position.
(A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of
assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true

25 Assertion (A): Mr. Roy sends Rs. 95,000 as a birthday gift to his son living in England.
Reason (R): It will be recorded in debit side of Balance of Payments of India as it leads to
outflow of foreign currency.
(A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of

5|Page8 October 2021,ZIET BHUBANESWAR

 assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true.

26 Assertion (A): Balance of trade is also referred to as Balance of payments.

Reasoning (R): Balance of trade includes the value of imports and exports of visibles only.
(A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of
assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true.
27 Assertion (A): Trade balance of BOP shows deficit of Rs. 500 crore.
Reason (R): Export of goods worth Rs. 1100 crore and import of goods worth Rs. 1600
crore are recorded in the current account of balance of payments.
(A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of
assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true.
28 Assertion (A): Autonomous items cause movements of goods and services across the
borders.
Reason (R): Accommodating items cause to clear the imbalance in BOP.
(A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of
assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true.
29 Assertion (A): Autonomous transactions are independent of the state of BOP account.
Reason (R): Autonomous items are also known as above the line items
(A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of
assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true.
30 Assertion (A): Current account transactions bring a change in the current level of
country’s income.
Reason (R): Current account includes all items expressing change in stock.
(A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of
assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true.
31 Assertion (A): Balance of Trade includes only Merchandise Transactions.
Reason (R): Unfavourable Balance of Payments can be met out of favourable Balance of
Trade.
(A) Both Assertion and reason are true and reason is correct explanation of assertion.

6|Page8 October 2021,ZIET BHUBANESWAR

 (B) Assertion and reason both are true but reason is not the correct explanation of
assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true
32 Assertion (A):TheBoP reflect performance of our economy in relation to rest of the world.
Reason (R): BoP is an accounting statement that provide a systematic record of all the
economic transactions (inflow and outflow) between Residents of a country and the rest
of the world in a given period of time.
(A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of
assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true
33 Assertion (A):The decrease in official reserves(foreign exchange reserves) appears as a
credit item in BOP.
Reason (R):Any withdrawal from official reserves is recorded in the credit side of BoP
because there is inflow of foreign exchange to BoP from official reserves.
(A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of
assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true
34 Assertion (A):Portfolio investment is not a component of capital account of BoP.
Reason (R) :Portfolio investment refers to purchase of an asset from the rest of the world
which does not give full control of asset.
(A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of
assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true
35 Assertion (A): Current Account transactions bring a change in the current level of a
country's income.
Reason (R): Current Account includes all items expressing change in stock.
(A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of
assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true

7|Page8 October 2021,ZIET BHUBANESWAR

Answer
Q.No. Answer
1 (A)
2 (A)
3 (D)
4 (A)
5 (D)
6 D
7 D
8 D
9 D
10 A
11 A
12 A
13 C
14 C
15 B
16 A
17 D
18 D
19 A
20 D
21 C
22 A
23 C
24 A
25 A
26 D
27 A
28 B
29 B
30 C
31 C
32 A
33 A
34 D
35 A

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8|Page8 October 2021,ZIET BHUBANESWAR

 CHAPTER -18. FOREIGN EXCHANGE RATE
ASSERTION- REASON QUESTIONS
Sl.No. Question
1 Assertion (A) : Equilibrium exchange rate is determined by the demand for and supply of
foreign exchange in the market.
Reason (R) : At equilibrium, demand for foreign exchange is equal to supply of foreign
exchange.
A. Both Assertion (A) and Reason (R) are true and (R) is the correct explanation of (A)
B. Both Assertion (A) and Reason (R) are true but (R) is not the correct explanation of (A)
C. Only Assertion (A) is true and Reason (R) is false
D. Assertion (A) is false but Reason (R) is true

2 Assertion (A) : Rise in the value of domestic currency in terms of foreign currency in the
market is called appreciation of domestic currency.
Reason (R) : When there is appreciation of domestic currency, export of domestic country
increases.
A. Both Assertion (A) and Reason (R) are true and (R) is the correct explanation of (A)
B. Both Assertion (A) and Reason (R) are true but (R) is not the correct explanation of (A)
C. Only Assertion (A) is true and Reason (R) is false
D. Assertion (A) is false but Reason (R) is true

3 Assertion (A) : If US dollar exchanges for Rs 70, instead of Rs 64 earlier in foreign exchange
market, it is called depreciation of rupee.
Reason (R) : If US dollar exchanges for Rs 45, instead of Rs 60 earlier in foreign exchange
market, it is called appreciation of rupee.
A. Both Assertion (A) and Reason (R) are true and (R) is the correct explanation of (A)
B. Both Assertion (A) and Reason (R) are true but (R) is not the correct explanation of (A)
C. Only Assertion (A) is true and Reason (R) is false
D. Assertion (A) is false but Reason (R) is true
4 Assertion (A) : Gold standard system is an example of fixed exchange rate system.
Reason (R) : In fixed exchange rate system the exchange rate is officially fixed by the

1|Page 8 October 2021,ZIET BHUBANESWAR

 Government.
A. Both Assertion (A) and Reason (R) are true and (R) is the correct explanation of (A)
B. Both Assertion (A) and Reason (R) are true but (R) is not the correct explanation of (A)
C. Only Assertion (A) is true and Reason (R) is false
D. Assertion (A) is false but Reason (R) is true

5 Assertion (A) Spot market is of daily nature.

Reason (R) : In spot market future transactions are carried out.
A. Both Assertion (A) and Reason (R) are true and (R) is the correct explanation of (A)
B. Both Assertion (A) and Reason (R) are true but (R) is not the correct explanation of (A)
C. Only Assertion (A) is true and Reason (R) is false
D. Assertion (A) is false but Reason (R) is true

6 Assertion(A):Buyingforeigngoodsisexpenditurefromourcountryanditbecomestheincomeofthatforeign
country.
Reason(R):The purchaseofforeigngoodsorimportsdecreasesthedomestic
demandforgoodsandservicesin our country.

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 and 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.
7
Assertion (A): Managed Floating exchange rate system is also called as 'Dirty Floating'
Reason(R): Clean Floating rate is influenced by the intervention of the Central Bank in the
Foreign ExchangeMarket.
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 and 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.

8 Assertion(A):FixedExchangeratesysteminvolvesactiveinvolvementofcentralbank/governmentof
therespectivecountries.
Reason (R): In fixed exchange rate system, once the exchange rate is decided it is
usuallykeptas fixedin ordertomaintain thestabilityin economictransactions
.
A. Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of
Assertion (A)

2|Page 8 October 2021,ZIET BHUBANESWAR

 B. Both Assertion (A) and Reason (R) are true and 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.

9 Assertion(A):Purchaseofsecond-handmachineryfromabroadisnotrecordedinbalanceof payment.
Reason(R):Saleandpurchaseofsecond-handgoodsfromabroadarenotincludedintheestimationof
nationalincome
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 and 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.
10 Assertion(A):IfanIndianbuysaUKCarCompany,itrenters’capitalaccounttransactionsas
adebititem.
Reason(R):SaleofassetslikesaleofshareofanIndiancompanytoaChinesecustomerisacredititem
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 and 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.
11 Assertion (A): Appreciation of domestic currency means a rise in the price of domestic
currency
Reason (R): Appreciation leads to increase in exports.
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, and 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

12 Assertion (A): Depreciation of domestic currency leads to rise in exports.

Reason (R): Depreciation of domestic currency makes domestic currency relatively cheaper,
which leads to increase in exports.
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 and 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

13 Assertion (A): Managed Floating Exchange rate system is a combination of fixed and flexible
exchange rate systems.

3|Page 8 October 2021,ZIET BHUBANESWAR

 Reason (R): In managed floating exchange rate system, central bank decides the limit of Both
A. 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 and 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

14 Assertion (A): Appreciation of domestic currency means a rise in the price of domestic
currency.
Reason (R): Appreciation leads to increase in Exports.
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 and 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.
15 Assertion (A): Managed floating exchange rate system is also called as ‘Dirty floating’.
Reason (R): Clean floating rate is influenced by the intervention of the central bank 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 and 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.
16 Assertion A: An increase in demand for imported goods raises the foreign exchange rate.
Reason R: Demand for foreign exchange will increase in order to make the payment for
imported goods. Supply of foreign exchange may change; increase in demand will cause the
exchange rate to rise.

A. Both Assertion and reason are true and reason is correct explanation of assertion.
B. Assertion and reason both are true but reason is not the correct explanation of assertion.
C. Assertion is true, reason is false.
D. Assertion is false, reason is true.

17 Assertion A: Under managed floating exchange rate system, the Government directly controls
the exchange rate.
Reason R: Managed floating exchange rate is decided by market forces (the float part) but
remains within a specific range as decided by central bank (the managed part).
A. Both Assertion and reason are true and reason is correct explanation of assertion.
B. Assertion and reason both are true but reason is not the correct explanation of assertion.
C. Assertion is true, reason is false.
D. Assertion is false, reason is true.

18 Assertion A: Flexible exchange rate is determined by the market forces of demand and supply.

4|Page 8 October 2021,ZIET BHUBANESWAR

 Reason R: It is also known as floating exchange rate.
A. Both Assertion and reason are true and reason is correct explanation of assertion.
B. Assertion and reason both are true but reason is not the correct explanation of assertion.
C. Assertion is true, reason is false.
D. Assertion is false, reason is true

19 Assertion A : Both devolution and depreciation of currency encourages the export of a

country.
Reason R: Depreciation of currency takes place due to Government, while devaluation takes
place due to market forces of demand and supply.

A. Both Assertion and reason are true and reason is correct explanation of assertion.
B. Assertion and reason both are true but reason is not the correct explanation of assertion.
C. Assertion is true, reason is false.
D. Assertion is false, reason is true

20 Assertion A: Depreciation of domestic currency leads to rise in exports to foreign countries.

Reason R: Due to depreciation of domestic currency, more goods can be purchased from India
with the same amount of foreign currency.

A. Both Assertion and reason are true and reason is correct explanation of assertion.
B. Assertion and reason both are true but reason is not the correct explanation of assertion.
C. Assertion is true, reason is false.
D. Assertion is false, reason is true.

21 . Assertion(A): Foreign exchange management and control is undertaken by commercial banks.

Reason (B): RBI has to maintain the official rate of exchange of rupee to ensure its stability.
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 and 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.
22 Assertion (A): Exchange control means the state intervention.
Reason (R): Exchange control means the forex 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 and 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.
23 Assertion (A) countries combat currency weakness caused by instability in emerging markets
worldwide
Reasoning(R): Central banks with a dirty float sometimes intervene to steady the market at
times of widespread economic uncertainty.
A. Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of
Assertion (A).

5|Page 8 October 2021,ZIET BHUBANESWAR

 B. Both Assertion (A) and Reason (R) are true and 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.
24 Assertion (A): The central bank can purchase a large amount of its own currency to limit the
amount of devaluation caused by the hedge fund.
Reasoning (R): Central banks sometimes intervene to support a currency that is under attack by
a hedge fund or other speculator.
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 and 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.
25 Assertion (A): An economic shock refers to any change to
fundamental macroeconomic variables or relationships that has a substantial effect on
macroeconomic outcomes and measures of economic performance, such as unemployment,
consumption, and inflation.
Reason(R): A supply shock is an event that makes production across the economy more
difficult, more costly, or impossible for at least some industries.
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 and 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.

6|Page 8 October 2021,ZIET BHUBANESWAR

ANSWER

Q.No. Answer
1 A
2 C
3 B
4 A
5 C
6 A
7 A
8 B
9 D
10 A
11 C
12 A
13 A
14 C
15 A
16 A
17 D
18 B
19 C
20 A
21 B
22 A
23 D
24 D
25 D

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