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

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 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. In other words, they are determined by the net consequences of the autonomous transactions. Since the official reserve transactions are made to bridge the gap in the BoP, they are seen as the accommodating item in the BOP.

In a situation of Balance of payments deficit, which of the following will be true?

Official reserves will fall.

The correct answer is Option (2) → Official reserves will fall.

When a country faces a Balance of Payments (BoP) deficit, it means autonomous payments exceed autonomous receipts, leading to a shortage of foreign exchange. To bridge this gap, the central bank sells foreign currency from its official reserves to balance international payments. As a result, the official reserves decrease.