Question

    Which of the following is the possible impact of excessive Current Account Deficit (CAD)?

    A Depreciation of domestic currency Correct Answer Incorrect Answer
    B Increase in Foreign Exchange reserve Correct Answer Incorrect Answer
    C Increases the growth rate of economy Correct Answer Incorrect Answer
    D Decrease in Foreign Direct Investment (FDI) Correct Answer Incorrect Answer
    E None of the above Correct Answer Incorrect Answer

    Solution

    High Current Account Deficit (CAD) means, there is a mismatch in demand and supply of foreign currency. There is higher demand for foreign currency (mainly US dollar) compared to supply. Thus the currency will depreciate. In this case, sometimes RBI intervenes by supplying foreign currency from its reserve to meet the demand. Thus it will lead to decrease in Foreign Exchange reserve of RBI. Deficit or surplus in Current Account does not have any direct impact on Growth rate of an economy.

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