Given below are two statements, one is labelled as Assertion (A) and the other as Reason (R).
Assertion (A) : The value of national currency determined by demand and supply of foreign currency is call

Question

Given below are two statements, one is labelled as Assertion (A) and the other as Reason (R).
Assertion (A) : The value of national currency determined by demand and supply of foreign currency is called flexible exchange rate.
Reason (R) : Demand and supply of the foreign currency is being determined by the Central Bank.
Select the correct answer from the codes given below :

UnlockIAS · Accepted Answer

Correct — D, (A) is true, but (R) is false. The Assertion is the standard textbook definition. A flexible — or floating — exchange rate is one at which the external value of the national currency is settled in the foreign exchange market by the demand for and supply of foreign currency, with no official parity being defended. Its opposite is the fixed exchange rate, where the authorities announce a parity and buy or sell reserves to hold it, and where a deliberate downward change is called devaluation rather than depreciation. So (A) stands. The Reason contradicts the very definition the Assertion states. Under a flexible rate the demand for and supply of foreign currency come from the market — importers and exporters settling trade, foreign portfolio and direct investors moving capital in and out, Indians remitting money home, travellers, and firms servicing external debt. If a central bank were the body that determined that demand and supply, the rate would no longer be market-determined and the regime would not be flexible at all. A central bank certainly participates: the Reserve Bank of India buys and sells dollars in the market, so India's rupee floats within a managed float rather than a pure one. But participating in a market is not the same as determining it, and the question's phrasing — that demand and supply 'is being determined by the Central Bank' — is false as written. Hence (A) true, (R) false, which is option (d).

Why the other options are wrong — (a) This is the option a candidate picks who reads the two statements as agreeing because both mention demand and supply of foreign currency. They do not agree — they are in direct conflict. (A) says the market settles the rate; (R) says the central bank settles the market. Both cannot be true of the same regime, so (R) cannot be the explanation of (A).  (b) Reverses the truth values. (A) is the accepted definition of a flexible exchange rate and appears in that form in every standard text. (R) is the false half: in a floating regime the demand and supply of foreign exchange arise from traders, investors, remitters and travellers, not from the central bank.  (c) Correctly senses that (R) does not explain (A), but still certifies (R) as true. It is not. Note the trap: (R) would be closer to describing a fixed or pegged regime, where the authority sets the parity and defends it with reserves — but the Assertion is expressly about the flexible rate, and against that background (R) is simply wrong.

Concept: An exchange rate is the price of one currency in terms of another, and the question of who sets that price divides the world's regimes. Under a fixed or pegged rate the government or central bank announces a parity and defends it by buying or selling foreign exchange from its reserves; a deliberate lowering of that parity is a devaluation and a deliberate raising is a revaluation. Under a flexible or floating rate no parity is announced and the price is cleared in the foreign exchange market; a fall in the currency's value is then called a depreciation and a rise an appreciation. Most countries, India included, sit between the two poles in a managed float — the rate is market-determined, but the central bank enters the market as a participant to smooth disorderly movements.

State PCS 2024 Q116 — Economy PYQ with Answer

State PCS 2024 Q116 — Economy PYQ with Answer