Assertion (A): Under a fixed exchange rate system, a deficit in the BoP is met by the government through the use of its official reserves.
Reason (R): Under a fixed exchange rate system, the government does not need to keep stocks of foreign exchange reserves.
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (A) is true but (R) is false.
Assertion (A): Under a fixed exchange rate system, a deficit in the BoP is met by the government through the use of its official reserves. — True. To hold the fixed rate, the government fills the gap from its official reserves.
Reason (R): Under a fixed exchange rate system, the government does not need to keep stocks of foreign exchange reserves. — False. A fixed rate needs reserves. If reserves look too small, people doubt the rate can be held.
NCERT (2026-27): “6.2.3 Merits and Demerits of Flexible and Fixed Exchange Rate Systems … 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. …” |