Q. Given below are two statements, one is labelled as Assertion (A) and the other as Reason (R).
Assertion (A): The value of national currency is determined by demand and supply of foreign currency 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.
a) Both (A) and (R) are true and (R) is the correct explanation of (A).
b) (A) is false, but (R) is true.
c) Both (A) and (R) are true, but (R) is not the correct explanation of (A).
d) (A) is true, but (R) is false.
Question from UPPSC Prelims 2024
The correct answer is: d) (A) is true, but (R) is false.
Explanation:
– Assertion (A): The value of a national currency is determined by the demand and supply of foreign currency under a flexible exchange rate system. This statement is true because, in a flexible exchange rate system, the exchange rate is determined by market forces—i.e., the interaction of demand and supply for foreign currency in the foreign exchange market.
– Reason (R): The demand and supply of foreign currency are determined by the Central Bank. This statement is false because, under a flexible exchange rate system, the Central Bank does not directly control or determine the demand and supply of foreign currency. Instead, these are influenced by factors such as trade flows, capital flows, interest rates, and economic conditions. The Central Bank may intervene in a managed or fixed exchange rate system, but not in a purely flexible system.
Thus, while the assertion is correct, the reason provided is incorrect.
