Question

Read the following statements – Assertion and Reason (R). Choose the correct option from those given below: Assertion : Increase in exchange rate implies that the price of foreign currency in terms of domestic currency has increased. Reason (R): Balance of trade records the inflows and outflows of goods.

• A. Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
• B. Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).
• C. Assertion (A) is false, but Reason (R) is true.
• D. Assertion (A) is false and Reason (R) is true.

Hint:

Increase in exchange rate indicates depreciation of domestic currency, making foreign goods costlier.

Answer 1

The Correct Option is B

Step 1:Analyze Assertion (A)
An increase in the exchange rate implies:

• More units of domestic currency are required to purchase one unit of foreign currency.
• This indicates a depreciation of domestic currency.
• As a result, foreign currency becomes more expensive in terms of domestic currency.

\[ \text{Assertion (A) is true} \]
Step 2:Analyze Reason (R)
Balance of Trade (BoT) refers to:

• The difference between exports and imports of goods.
• Exports represent inflow of goods (and foreign exchange earnings).
• Imports represent outflow of goods (and foreign exchange payments).

\[ \text{Reason (R) is true} \]
Step 3:Relation between A and R

• Although both statements are correct, the reason does not explain the assertion.
• Exchange rate changes are determined by demand and supply of foreign exchange, not merely by the definition of balance of trade.

\[ \text{Hence, both A and R are true, but R is not the correct explanation of A} \]