Macro

Balance of Payments

Medium

Read the passage carefully and answer the question based on the passage:

Balance of Payment is defined as the statement of accounts of a country's inflow and outflows of foreign exchange during a specified period of time. It consists of two main accounts, i.e. Current Account and Capital Account. A deficit or surplus in the current account is determined by the country's exports and imports, whereas the capital account records transactions involving non-financial and financial assets.

India's BOP typically reflects its trade deficit, services surplus and capital inflows. To finance the deficit in its overall BOP, few transactions take place in its official reserves of foreign exchange.

What is the role of official reserve account?

Records trade in goods.

Reflects errors in data.

Stabilize the currency and manage BOP imbalance.

Attracts foreign investment.

✅ Correct Option: 3

Option 1 -> Records trade in goods is the function of the current account, not the official reserve account.

Option 2 -> Reflects errors in data is handled by the 'Errors and Omissions' section, not the official reserve account.

Option 3 -> Stabilize the currency and manage BOP imbalance is the primary role of official reserves held by the central bank.

Option 4 -> Attracts foreign investment is not a direct function of the official reserve account; it's recorded in the capital account.

Hence, Stabilize the currency and manage BOP imbalance -> The official reserve account records changes in a country's official reserves (foreign currencies, gold, SDRs) held by the central bank. These reserves are used to intervene in foreign exchange markets to stabilize currency values and finance balance of payments deficits or absorb surpluses, ensuring economic stability -> correct

Question 46

What does capital account of BOP record?

Question 48

What could persistent current account deficit lead to?

Question 49

What does the BOP record?

Question 50

How can a country reduce the BOP deficit?

What is the role of official reserve account?

Solution

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