A country’s current account is one of the two components of its balance of payments, the other being the capital account (also known as the financial account). The current account consists of the balance of trade, balance of services and remittances.

Statement 1: As the confidence reduces, FIIs start withdrawing and the capital account deficit increases. Moreover, new FDI may not come due to poor macroeconomic conditions, and CAD will not be financed leading to a weakening of the rupee.
Statement 2: If the same money would have been used for investment, it would have reduced supply side bottlenecks, and generated significant demand leading to economic growth. But, only consumption spending (as in the case of revenue deficit) would put greater pressure on supply side and inflate price leading to uncompetitive products. Exports fall, trade deficit will increase and rupee will weaken.

There is a strong connection between the government’s tax revenue earnings and economic growth. The simple fact is that as the economy achieves faster growth, the tax revenue of the government also goes up. Tax buoyancy explains this relationship between the changes in government’s tax revenue growth and the changes in GDP. It refers to the responsiveness of tax revenue growth to changes in GDP. When a tax is buoyant, its revenue increases without increasing the tax rate.

Statement 2: The real exchange rate is often taken as a measure of a country’s international competitiveness as it takes into account purchasing power at both nations.
The real exchange rates are nothing but the nominal exchange rates multiplied by the price indices of the two countries. This means the market price level of goods and services, given by indices of inflation. So if the price level in the US is higher than the price level in India, then the real exchange rate of the rupee versus the dollar will be greater than the nominal exchange rate.

A managed-exchange-rate system is a hybrid or mixture of the fixed and flexible exchange rate systems in which the government of the economy attempts to affect the exchange rate directly by buying or selling foreign currencies or indirectly, through monetary policy (i.e., by lowering or raising interest rates on foreign currency bank accounts, affecting foreign investment, etc.).Today, most of the economies have shifted to this system of exchange rate determination. Almost all countries tend to intervene when the markets become disorderly or the fundamentals of economics are challenged by the exchange rate of the time.