Which of the following is not correct in respect of Flexible Exchange rate system?
Answer & explanation
Correct answer: option 3
The correct answer is option 3: In this regime, when the price of domestic currency (rupees) in terms of foreign currency (dollars) increases, it is called depreciation of the domestic currency (rupees) in terms of foreign currency (dollars).
Option 1: This is also known as Floating Exchange Rate system. True.
Option 2: In a completely flexible system, the Central banks do not intervene in the foreign exchange market. True. In a "pure" float, the Central Bank allows market forces (demand and supply) to determine the rate entirely. If the Central Bank does intervene to stabilize the currency, it is technically called a Managed Floating system
Option 3: In this regime, when the price of domestic currency (rupees) in terms of foreign currency (dollars) increases, it is called depreciation of the domestic currency (rupees) in terms of foreign currency (dollars). False. This is known as "Appreciation" and not "Depreciation:.