Assertion (A): Under a flexible exchange rate system, the government must hold large stocks of foreign exchange reserves.
Reason (R): Under a flexible exchange rate system, movements in the exchange rate automatically take care of surpluses and deficits in the BoP.
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → (A) is false but (R) is true.
Assertion (A): Under a flexible exchange rate system, the government must hold large stocks of foreign exchange reserves. — False. Under a flexible rate the government does not need large reserves, since it does not intervene to hold a rate.
Reason (R): Under a flexible exchange rate system, movements in the exchange rate automatically take care of surpluses and deficits in the BoP. — True. This is the major advantage of flexible rates.
NCERT (2026-27): “6.2.3 Merits and Demerits of Flexible and Fixed Exchange Rate Systems … 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. …” |