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.
In the light of the given statements, choose the correct option from the following :
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.
In the light of the given statements, choose the correct option from the following :
Show Hint
- Statement 1 is true and statement 2 is false.
- Statement 1 is false and statement 2 is true.
- Both statements 1 and 2 are true.
- Both statements 1 and 2 are false.
The Correct Option is D
Solution and Explanation
Under a fixed exchange rate system, the government or central bank sets the rate. It keeps foreign exchange reserves to defend that rate.
Under a flexible (floating) system, demand and supply in the foreign exchange market decide the rate. The central bank does not step in.
Step 2: Check Statement 1:
Depreciation is a fall in the value of a currency caused by market forces under a flexible system. It is not a government action.
When the government lowers the value of its currency under a fixed system, the term is devaluation. So Statement 1 is false.
Step 3: Check Statement 2:
Authorities hold foreign exchange reserves and intervene to keep the rate steady under a fixed system. Under a floating system, they do not intervene.
So Statement 2 is false.
Step 4: Why the other options are wrong:
(A) says Statement 1 is true. It confuses depreciation with devaluation.
(B) says Statement 2 is true. Intervention and reserves belong to the fixed system.
(C) says both are true, but both are false.
Final Answer:
Both statements are false. This is option (D).
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