Assertion (A): Under a managed floating exchange rate system, official reserve transactions are not equal to zero.
Reason (R): In a completely flexible exchange rate system, central banks do not intervene in the foreign exchange market.
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Both (A) and (R) are true but (R) is not the correct explanation of (A).
Assertion (A): Under a managed floating exchange rate system, official reserve transactions are not equal to zero. — True. Central banks buy and sell foreign currencies to moderate exchange rate movements, so their reserves change.
Reason (R): In a completely flexible exchange rate system, central banks do not intervene in the foreign exchange market. — True. Under a pure float, the rate is left to the market forces of demand and supply.
Why R does not explain A?
R describes a different system, the pure float, in which reserves do not move. It does not tell us why reserves move under managed floating. The real explanation of A: under managed floating, central banks intervene to buy and sell foreign currencies whenever they feel such actions are appropriate.
NCERT (2026-27): “6.2.4 Managed Floating Without any formal international agreement, the world has moved on to what can be best described as a managed floating exchange rate system. It is a mixture of a flexible exchange rate system (the float part) and a fixed rate system (the managed part). 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.” “Flexible Exchange Rate This exchange rate is determined by the market forces of demand and supply. It is also known as Floating Exchange Rate. … In a completely flexible system, the Central banks do not intervene in the foreign exchange market. …” |