Question
Download Solution PDFGiven below are two statements, one is labelled as Assertion (A) and the other as Reason (R).
Assertion (A): The value of national currency determined by demand and supply of foreign currency is called flexible exchange rate.
Reason (R): Demand and supply of the foreign currency is being determined by the Central Bank.
Select the correct answer from the codes given below:
Answer (Detailed Solution Below)
Detailed Solution
Download Solution PDFThe Correct answer is Option 4.
Key Points
-
Assertion (A): The value of a national currency determined by demand and supply of foreign currency is called a flexible exchange rate.
- True.
- A flexible (floating) exchange rate is determined by the market forces of demand and supply of foreign currency without direct government or central bank intervention.
- Currencies like the US Dollar, Euro, and Indian Rupee operate under a managed float system, where the exchange rate fluctuates based on market demand and supply.
-
Reason (R): Demand and supply of foreign currency is determined by the Central Bank.
- False.
- In a flexible exchange rate system, the foreign exchange market determines the demand and supply of currency, not the central bank.
- The central bank (e.g., RBI, Federal Reserve) only intervenes in a managed float system to stabilize extreme fluctuations but does not fix the exchange rate in a fully flexible regime.
Thus, while (A) is correct, (R) is false, making Option 4 the correct answer.
Last updated on May 26, 2025
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