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.

In the light of the given statements, choose the correct option from the following:

पर्याय

• 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.

Answer 1

Both statements 1 and 2 are false.

Explanation:

• Statement 1 is false. Under a fixed (pegged) exchange-rate system, an official change in the peg by the government is called devaluation (not “depreciation”); depreciation refers to a market-driven fall in the currency under flexible rates.
• Statement 2 is false: in a purely floating (flexible) system, central banks do not intervene; only under managed/dirty floats do authorities actively buy/sell foreign exchange and use reserves to moderate movements.