Question

Assertion (A): In case of a flexible exchange rate system, the foreign exchange rate is determined by the demand and supply of foreign exchange.

Reason (R): The government is not responsible for stabilising the external value of the domestic currency under the flexible exchange rate mechanism.

Options

• Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation for Assertion (A).

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

• Assertion (A) is true, but Reason (R) is false.

• Assertion (A) is false, but Reason (R) is true.

Answer 1

Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation for Assertion (A).

Explanation:

A flexible exchange rate is determined by market demand and supply. The Reason is also true and explains this: without official intervention to stabilise the currency, market forces determine the exchange rate.