Question

Read the following statements carefully:
Statement 1: Depreciation of currency is an economic action undertaken by the government of a nation under the fixed exchange rate system.
Statement 2: Under the floating exchange rate system, authorities actively intervene in the foreign exchange market by way of maintaining foreign exchange reserves.

• A. Statement 1 is true and statement 2 is false.
• B. Statement 1 is false and statement 2 is true.
• C. Both statements 1 and 2 are true.
• D. Both statements 1 and 2 are false.

Hint:

In a fixed exchange rate system, the government or central bank controls the currency value, while in a floating exchange rate system, the market determines it, with possible government interventions to maintain stability.

Answer 1

The Correct Option is B

Step 1: Understanding Statement 1.
Statement 1 is incorrect. Depreciation of currency happens naturally in a floating exchange rate system where the value of the currency is determined by market forces. Under a fixed exchange rate system, the government or central bank sets the exchange rate and must actively intervene to maintain the value of its currency.
Step 2: Understanding Statement 2.
Statement 2 is correct. In a floating exchange rate system, currency values are determined by market supply and demand, and authorities may intervene to stabilize the exchange rate by maintaining foreign exchange reserves or through market operations.
Step 3: Evaluation of the options.

• (A) Statement 1 is true and statement 2 is false: Incorrect. Statement 1 is false, and Statement 2 is true.
• (B) Statement 1 is false and statement 2 is true: Correct. Statement 1 is false, and Statement 2 is true.
• (C) Both statements 1 and 2 are true: Incorrect. Statement 1 is false.
• (D) Both statements 1 and 2 are false: Incorrect. Statement 2 is true.

Step 4: Conclusion.
Statement 1 is false, and Statement 2 is true. Final Answer:} Statement 1 is false and statement 2 is true.