INSIGHT UPSC QUIZ

GS Economy Monetary and Fiscal Policy
Q.

In order to balance any deficit in its balance of payments, a country can use which of the following financial measures?

1. Surplus in the capital account.

2. Official reserve sale.

3. Autonomous Transactions.

4. Accommodating Transactions.

Select the correct answer using the code given below.

Explanation:

ANSWER: (B)

  • A country that has a deficit in its current account (spending more than it receives from sales to the rest of the world) must finance it by selling assets or by borrowing abroad. Thus, any current account deficit must be financed by a capital account surplus, that is, a net capital inflow.
  • In this case, in which a country is said to be in balance of payments equilibrium, the current account deficit is financed entirely by international lending without any reserve movements.
  • Alternatively, the country could use its reserves of foreign exchange in order to balance any deficit in its balance of payments. The reserve bank sells foreign exchange when there is a deficit. This is called official reserve sale. 

Autonomous and Accommodating Transactions

  • International economic transactions are called autonomous when transactions are made due to some reason other than to bridge the gap in the balance of payments, that is, when they are independent of the state of Balance of Payment (BoP). One reason could be to earn profit. These items are called ‘above the line’ items in the BoP. The balance of payments is said to be in surplus (deficit) if autonomous receipts are greater (less) than autonomous payments.
  • Accommodating transactions (termed ‘below the line’ items), on the other hand, are determined by the gap in the balance of payments, that is, whether there is a deficit or surplus in the balance of payments. Since the official reserve transactions are made to bridge the gap in the BoP, they are seen as the accommodating item in the BoP (all others being autonomous).

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