Question

In 1987, Country G faced a foreign currency crisis. Its foreign currency reserves were insufficient to pay for its imports. Hence, it had to take a loan.

Which of the following can be true with respect to the foreign currency crisis?

• A. Country G's exports were greater than imports. Hence, it had to pay more foreign currency than it received.
• B. Country G's exports were greater than imports. However, it could not convert the Indian currency received from exports to foreign currency to pay for imports.
• C. Country G's imports were almost equal to its exports. However, it could not convert the Indian currency received from exports to foreign currency to pay for imports.
• D. Country G's imports were greater than its exports. Hence, it had to pay more foreign currency than it received.

Answer 1

The correct option is D Country G's imports were greater than its exports. Hence, it had to pay more foreign currency than it received.

When a country imports, it pays in foreign currencies. When a country exports, it earns in foreign currencies. Country G's imports were greater than its exports. Therefore, it had less foreign currency reserves to pay for its imports. When imports are greater than exports, a country has an unfavourable balance of trade.