Arrange the following statements in correct sequence relating to change in exchange.

(A) The Central Bank intervenes to purchase dollars rate between Dollars and Rupee in the foreign exchange market.

(B) The government sets the exchange rate above the equilibrium exchange rate.

(C) This will absorb the excess supply of dollars in the foreign exchange market.

(D) It will result in excess supply of dollars in the foreign exchange market.

Choose the correct answer from the options given below :

(B), (D), (A), (C)

The correct answer is option (1) : (B), (D), (A), (C)

The sequence of events related to a change in exchange rate is as follows:

1. The government sets the exchange rate above the equilibrium exchange rate (Statement B)

   • When the exchange rate is fixed above the equilibrium rate, the domestic currency is overvalued, making imports cheaper and exports more expensive.

2. It will result in excess supply of dollars in the foreign exchange market (Statement D)

   • Since the exchange rate is artificially high, exporters receive fewer rupees for their goods, and imports become cheaper, leading to an excess supply of dollars in the market.

3. The Central Bank intervenes to purchase dollars in the foreign exchange market (Statement A)

   • To maintain the fixed exchange rate, the central bank steps in to buy the surplus dollars, preventing the exchange rate from falling.

4. This will absorb the excess supply of dollars in the foreign exchange market (Statement C)

   • As the central bank purchases the excess dollars, it helps stabilize the exchange rate at the desired level.