Which of the following is MERIT of flexible exchange rate system?

• The problem of over/under valuation of the currency is permanently solved
• There is a requirement to hold 100% gold reserves by the government
• It discourages international trade due to stable currency rates
• It encourages venture capital

1 and 4

The correct answer is option 4: 1 and 4

Here's a breakdown of why:

Flexible exchange rate system is the system where the exchange rate is determined by the market forces of demand and supply and there is no government intervention.

Merit 1: The problem of over/under valuation of the currency is permanently solved. A flexible exchange rate system allows the currency's value to fluctuate freely based on market forces. This means that if a currency becomes overvalued, it will depreciate, making exports more competitive and imports more expensive. Conversely, if a currency becomes undervalued, it will appreciate, making imports cheaper and exports less competitive. This self-correcting mechanism helps to prevent persistent overvaluation or undervaluation.

Merit 4: It encourages venture capital. A flexible exchange rate system can encourage foreign investment, including venture capital. This is because investors are less concerned about currency risk when the exchange rate is allowed to fluctuate freely. This can lead to increased capital inflows and support economic growth.

The following are the merits of the same:

• It solves the problem of overvaluation/undervaluation of currencies
• There is no requirement of government to hold 100% of gold reserves
• It encourages the venture capital

The following are the demerits of the same:

1. There is no stability. Flexible exchange rate keeps on fluctuating according to demand and supply of the currency. 
2. Due to fluctuating currency exchange rate,  foreign trade is discouraged among the nations.