Which of the following statements are correct?
(A) If a fixed rate is set below the market rate, there is an excess demand for dollars.
(B) To hold such a rate, the government buys dollars for rupees in the market.
(C) If the government cannot meet the excess demand, a black market for dollars may come up.
(D) In a fixed system, a government action that increases the exchange rate is called devaluation.
(E) Revaluation makes the domestic currency cheaper for foreigners.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → (A), (C) and (D) only
A rate set below the market rate makes dollars cheap, so many people want them.
(A) If a fixed rate is set below the market rate, there is an excess demand for dollars. — Correct. At a low price, demand is more than supply.
(B) To hold such a rate, the government buys dollars for rupees in the market. — Incorrect. It must supply dollars from its past holdings. Buying dollars is what it does when the rate is set above the market rate.
(C) If the government cannot meet the excess demand, a black market for dollars may come up. — Correct. Unmet demand moves to an unofficial market.
(D) In a fixed system, a government action that increases the exchange rate is called devaluation. — Correct. It makes the domestic currency cheaper.
(E) Revaluation makes the domestic currency cheaper for foreigners. — Incorrect. Revaluation lowers the rate and makes the domestic currency costlier.
NCERT (2026-27): “Fixed Exchange Rates … On the other hand if the goverment was to set an exchange rate at a level such as e2, there would be an excess demand for dollars in the foreign exchange market. To meet this excess demand for dollars, the government would have to withdraw dollars from its past holdings of dollars. If it fails to do so, a black market for dollars may come up. In a fixed exchange rate system, when some government action increases the exchange rate (thereby, making domestic currency cheaper) is called Devaluation. On the other hand, a Revaluation is said to occur, when the Government decreases the exchange rate (thereby, making domestic currency costlier) in a fixed exchange rate system.” |