Question

Read the following statements—Assertion (A) and Reason (R). Choose one of the correct alternatives given below: 
Assertion (A): Ceteris Paribus, Devaluation of domestic currency leads to an increase in National Income of a nation. 
Reason (R): Devaluation of domestic currency refers to reduction in the value of domestic currency with respect to foreign currency, under the fixed exchange rate system. 
 

• A. Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
• B. Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A).
• C. Assertion (A) is true, but Reason (R) is false.
• D. Assertion (A) is false, but Reason (R) is true.

Hint:

In economics, ensure you understand the causal relationships between policies (like devaluation) and their effects on macroeconomic variables (e.g., national income).

Answer 1

The Correct Option is B

Devaluation of the domestic currency makes exports cheaper and imports more expensive, which increases demand for domestically produced goods. This boosts production, employment, and, ultimately, the national income, making Assertion (A) true. Reason (R) correctly defines devaluation under a fixed exchange rate system, making it true as well. However, Reason (R) merely describes devaluation and does not explicitly explain its impact on national income, making it not the correct explanation for Assertion (A).