Given 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:

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  1. (A) is false, but (R) is true.
  2. Both (A) and (R) are true, but (R) is not the correct explanation of (A).
  3. Both (A) and (R) are true and (R) is the correct explanation of (A).
  4. (A) is true, but (R) is false.

Answer (Detailed Solution Below)

Option 4 : (A) is true, but (R) is false.
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Detailed Solution

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The 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.

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