Question

Statement 1: Devaluation of currency is said to occur when the exchange rate is decreased under the Fixed Exchange Rate System.

Statement 2: Under the Floating Exchange Rate System, competent authorities do not maintain foreign exchange reserves.

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

Options

• 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

Statement 1 is false and Statement 2 is true.

Explanation:

Devaluation occurs when the exchange rate is officially increased (not decreased) in a fixed exchange rate system, weakening the domestic currency. Exchange rates in a floating exchange rate system are controlled by market forces; therefore, governments do not typically hold considerable foreign exchange reserves.