Question

Which of the following statements is/are correct?

• A. The fixed exchange rate is determined by the government
• B. Flexible exchange rates are determined based on the market forces (demand and supply of foreign currency)
• C. Both (A) and (B)
• D. None of these

Hint:

Fixed exchange rates are controlled by the government, while flexible exchange rates are influenced by market forces like supply and demand.

Answer 1

The Correct Option is C

Step 1: Understanding Exchange Rate Systems:
An exchange rate is the value of one country's currency in terms of another country's currency. There are two primary systems for determining exchange rates: fixed exchange rates and flexible exchange rates. Step 2: Analyzing the Statements:
- Option (A) Fixed exchange rate is determined by the government: In a fixed exchange rate system, the value of a country's currency is pegged or fixed to another currency or a basket of currencies. The government or central bank maintains the exchange rate through interventions in the foreign exchange market.
- Option (B) Flexible exchange rates are determined based on market forces: In a flexible exchange rate system, the value of the currency is determined by the supply and demand for the currency in the foreign exchange market. This system is not controlled by the government, but rather by market forces.
- Option (C) Both (A) and (B): Both statements are correct. Fixed exchange rates are government-controlled, while flexible exchange rates are determined by market forces.
Step 3: Conclusion and Answer:
The correct answer is (C) because both the fixed and flexible exchange rate systems operate based on the principles described in options (A) and (B).