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:

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.