Which of the following statements are correct?
(A) Official reserve transactions are seen as the accommodating item in the BoP, since they are made to bridge its gap.
(B) The monetary authorities are the ultimate financiers of any deficit in the balance of payments.
(C) An increase in official reserves is called the overall balance of payments deficit.
(D) Official reserve transactions are more relevant when exchange rates are floating than when they are fixed.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → (A) and (B) only
Official reserve transactions are the purchases and sales of foreign exchange by the monetary authority to cover a BoP gap.
(A) Official reserve transactions are seen as the accommodating item in the BoP, since they are made to bridge its gap. — Correct. They are made only because there is a gap to fill.
(B) The monetary authorities are the ultimate financiers of any deficit in the balance of payments. — Correct. In the end, the central bank pays for a deficit out of its reserves.
(C) An increase in official reserves is called the overall balance of payments deficit. — Incorrect. An increase in reserves is a surplus; a decrease is a deficit.
(D) Official reserve transactions are more relevant when exchange rates are floating than when they are fixed. — Incorrect. They matter more under fixed rates, when the government must hold the rate.
NCERT (2026-27): “6.1.3 Balance of Payments Surplus and Deficit … The decrease (increase) in official reserves is called the overall balance of payments deficit (surplus). The basic premise is that the monetary authorities are the ultimate financiers of any deficit in the balance of payments (or the recipients of any surplus). We note that official reserve transactions are more relevant under a regime of fixed exchange rates than when exchange rates are floating.” “Autonomous and Accommodating 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 (all others being autonomous).” |