The following are features of flexible rate system select the correct option.

(A) Give more flexibility to government.

(B) Restricts countries in conducting monetary policies.

(C) Government intervenes to fill gaps in BOP.

(D) Automatically takes care of surplus and deficit in BOP.

(E) Speculator attack on currency.

Choose the correct answer from the options given below :

(A) and (D) only

The correct answer is option (2) : (A) and (D) only

(A) Give more flexibility to government: This statement is correct. The flexible exchange rate system gives the government more flexibility and they do not need to maintain large stocks of foreign exchange reserves.

(B) Restricts countries in conducting monetary policies: This statement is incorrect. A flexible exchange rate system actually allows countries more freedom to conduct their monetary policies as they are not tied to maintaining a fixed exchange rate.

(C) Government intervenes to fill gaps in BOP: This statement is incorrect. In a flexible exchange rate system, governments typically do not intervene directly to correct gaps in the Balance of Payments (BOP); adjustments are made through market forces.

(D) Automatically takes care of surplus and deficit in BOP: This statement is correct. In a flexible exchange rate system, exchange rates adjust to automatically correct imbalances in the BOP over time. For instance, a trade deficit might cause the currency to depreciate, making exports cheaper and imports more expensive, which can help narrow the deficit.

(E) Speculator attack on currency: This statement is incorrect. Speculative attacks are more likely under a fixed exchange rate system and not Flexible Exchange rate system.

"The main feature of the fixed exchange rate system is that there must be credibility that the government will be able to maintain the exchange rate at the level specified. Often, if there is a deficit in the BoP, in a fixed exchange rate system, governments will have to intervene to take care of the gap by use of its official reserves. If people know that the amount of reserves is inadequate, they would begin to doubt the ability of the government to maintain the fixed rate. This may give rise to speculation of devaluation. When this belief translates into aggressive buying of one currency thereby forcing the government to devalue, it is said to constitute a speculative attack on a currency. Fixed exchange rates are prone to these kinds of attacks, as has been witnessed in the period before the collapse of the Bretton Woods System.

The flexible exchange rate system gives the government more flexibility and they do not need to maintain large stocks of foreign exchange reserves. The major advantage of flexible exchange rates is that movements in the exchange rate automatically take care of the surpluses and deficits in the BoP. 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."