Question

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 out flow of income.​

Answer 1

Answer:

Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).

Explanation :-

• The lending to abroad results outflow of foreign currency that also increases the financial assets of a country. Those foreign transactions that affects the coutries financial assets comes in capital account

Answer 2

Explanation:

In Capital Account, and on debit side of BOP, the lending of Indian investors to abroad will be recorded. Indian investors lending abroad cause an outflow of foreign exchange from the country. Thus, it is recorded as negative item in the Capital Account of BOP.

(ii) Lending to abroad by Indian investors will decrease the supply of foreign currency. This would shift the supply curve from SS to S'S'. With the shift in supply curve, the new equilibrium is established at point E', where the exchange rate rises from OR to OR

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