Match List-I with List-II
| List-I | List-II | ||
| (A) | Devaluation | (I) | When the government decreases the exchange rate of foreign currency. |
| (B) | Foreign Exchange Market | (II) | Exchange rate is determined by the market forces. |
| (C) | Revaluation | (III) | The market in which national currencies are traded for one another. |
| (D) | Floating Exchange Rate | (IV) | Government action increases the exchange rate of foreign currency. |
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → (A) - (IV), (B) - (III), (C) - (I), (D) - (II)
The exchange rate is the number of rupees needed to buy one unit of foreign currency, say one dollar. When it rises, for instance from Rs 50 to Rs 60 per dollar, foreign currency becomes dearer and the rupee cheaper; when it falls, the reverse. Currencies are bought and sold in the foreign exchange market, and how the rate is set there depends on the system:
Fixed exchange rate: the government sets the rate and changes it by its own decision, either raising it or lowering it.
Floating exchange rate: the rate is left to the market forces of demand for and supply of foreign exchange.
(A) Devaluation — this matches (IV) Government action increases the exchange rate of foreign currency. When the government of a fixed-rate country raises the rate, the domestic currency is made cheaper by an official decision, and the change is called devaluation. The country’s exports become cheaper for foreigners.
(B) Foreign Exchange Market — this matches (III) The market in which national currencies are traded for one another. Its main participants are commercial banks, foreign exchange brokers, other authorised dealers and the monetary authorities, and the market itself is world-wide.
(C) Revaluation — this matches (I) When the government decreases the exchange rate of foreign currency. Revaluation is the opposite of devaluation: in a fixed system the government lowers the exchange rate, making the domestic currency costlier.
(D) Floating Exchange Rate — this matches (II) Exchange rate is determined by the market forces. A flexible or floating exchange rate is set where the demand curve for foreign exchange cuts the supply curve, with no government action fixing it.
NCERT (2025-26): “6.2 The Foreign Exchange Market … The market in which national currencies are traded for one another is known as the foreign exchange market. The major participants in the foreign exchange market are commercial banks, foreign exchange brokers and other authorised dealers and monetary authorities.… Flexible Exchange Rate This exchange rate is determined by the market forces of demand and supply. It is also known as Floating Exchange Rate.… Fixed Exchange Rates … In a fixed exchange rate system, when some government action increases the exchange rate (thereby, making domestic currency cheaper) is called Devaluation. On the other hand, a Revaluation is said to occur, when the Government decreases the exchange rate (thereby, making domestic currency costlier) in a fixed exchange rate system.” |