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‘Current account… (Class 12 Economics SQP 2023-24, Q11)

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EconomicsCBSE Class 12 · Sample paper, session 2023-24 · 3 marks · Short answer

CBSE Class 12 Economics sample paper 2023-24: question 11

From the official CBSE sample question paper for 2023-24, section A, question 11, for 3 marks. Try it first; the hints and our step-by-step solution are below.

Q11 · 3 marks · Short answerOpen Economy Macroeconomics

‘Current account deficit in an economy must be financed by a corresponding capital account surplus’.
Do you agree with the given statement? Give valid reason(s) in support of your answer.

Source: official sample paper from cbseacademic.nic.in (PDF). See it in the full Sample paper 2023-24.

Hints

Open one hint at a time and try again before the next.

Hint 1

Does the BoP always balance in accounting terms?

Hint 2

How can a country pay for excess imports?

Step-by-step solution

Each step shows the marks it earns, as an examiner would award them. Checked by an independent re-solve from the question paper.

  1. Yes, I agree. In an accounting sense, the BoP always balances: Current account balance + Capital account balance (including changes in reserves) = 0.

    1 mark

  2. So if the current account is in deficit (payments > receipts for goods, services and transfers), the gap must be met by an equal net inflow in the capital account.

    1 mark

  3. The deficit is financed by net capital inflows such as borrowing from abroad, selling assets to foreigners, foreign investment or drawing down foreign exchange reserves.

    1 mark

Answer: Agree: since current account + capital account = 0, a current account deficit must be financed by net capital inflows (borrowing, sale of assets, reserves).

Where the marks are

  • Agreement with reasons (marked as a whole, 3)

Revise the chapter

Practise this chapterBoard-style questions from Open Economy Macroeconomics, one at a time, marked against the answer key and marking points.Back to the full paperSample paper 2023-24: every question, by section.

The question is transcribed from the official paper; figures are described in words. The solution, hints and chapter tag are ours. Spotted an error? Write tosupport@questionbuddy.in.