Question

Read the following statements : Assertion (A) and Reason (R). Choose the correct option from those given below :

Assertion (A) : Capital account is in balance when capital inflows are equal to capital outflows.

Reason (R) : Autonomous capital inflows indicate a decrease in assets and an increase in liabilities.

• 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) is false.
• D. Assertion (A) is false, but Reason (R) is true.

Hint:

Balance means inflows equal outflows, which is true. Autonomous inflows raise liabilities or cut assets, also true, but this does not explain the balance.

Answer 1

The Correct Option is B

Step 1: Check Assertion (A):
The capital account records capital inflows (credit) and capital outflows (debit). It is in balance when the two are equal, so the net capital flow is zero.
So Assertion (A) is true.

Step 2: Check Reason (R):
Autonomous capital inflows come in on their own, for example foreign direct investment or foreign borrowing. Foreigners then own more of India or lend more to India.
In accounting terms, the foreign assets of India fall or its foreign liabilities rise. So Reason (R) is also true.

Step 3: Check if (R) explains (A):
Balance depends only on whether inflows are equal to outflows. The nature of the inflows (asset or liability) does not decide that.
So (R) tells us what autonomous inflows are, but it does not explain why the account is in balance.

Step 4: Why the other options are wrong:
(A) is wrong because (R) is not the explanation of (A).
(C) is wrong because (R) is true, not false.
(D) is wrong because (A) is true, not false.

Final Answer:
Both statements are true, but (R) does not explain (A). This is option (B).