Which of the following statements are correct?
(A) A government that holds the rate above the market rate keeps adding to its foreign exchange.
(B) Devaluation takes place under a flexible system when market forces raise the exchange rate.
(C) Under managed floating, official reserve transactions are not equal to zero.
(D) A flexible system lets countries conduct their monetary policies more independently.
(E) A fixed rate set below the market rate leads to an excess supply of dollars.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (A), (C) and (D) only
Each statement is about how a system deals with demand and supply of dollars.
(A) A government that holds the rate above the market rate keeps adding to its foreign exchange. — Correct. It must keep buying the excess dollars.
(B) Devaluation takes place under a flexible system when market forces raise the exchange rate. — Incorrect. That is depreciation. Devaluation is a government action under a fixed rate.
(C) Under managed floating, official reserve transactions are not equal to zero. — Correct. Central banks buy and sell currencies to moderate the rate.
(D) A flexible system lets countries conduct their monetary policies more independently. — Correct. They need not intervene to hold a rate.
(E) A fixed rate set below the market rate leads to an excess supply of dollars. — Incorrect. A rate below the market rate gives an excess demand for dollars.
NCERT (2026-27): “Fixed Exchange Rates … Thus, through intervention, the Government can maintain any exchange rate in the economy. But it will be accumulating more and more foreign exchange so long as this intervention goes on.” “6.2.4 Managed Floating … Under this system, also called dirty floating, central banks intervene to buy and sell foreign currencies in an attempt to moderate exchange rate movements whenever they feel that such actions are appropriate. Official reserve transactions are, therefore, not equal to zero.” “6.2.3 Merits and Demerits of Flexible and Fixed Exchange Rate Systems … Also, countries gain independence in conducting their monetary policies, since they do not have to intervene to maintain exchange rate which are automatically taken care of by the market.” |