Question : Assertion: An increase in the exchange rate leads to a decrease in exports.
Reason: A higher exchange rate makes exports relatively more expensive, reducing their competitiveness.
Option 1: Both Assertion and Reason are true and correct explanation
Option 2: Both Assertion and Reason are true and incorrect explanation
Option 3: Assertion is true but Reason is false
Option 4: Assertion is false but Reason is true
Correct Answer: Both Assertion and Reason are true and correct explanation
Solution : The correct answer is (a) Both the Assertion and the Reason are true and provide a correct explanation.
The Assertion states that an increase in the exchange rate leads to a decrease in exports, which is true. When the exchange rate of a country's currency increases, it means that the currency has strengthened relative to other currencies. This makes the country's exports relatively more expensive in foreign markets, reducing their competitiveness. As a result, foreign buyers may choose to purchase fewer exports, leading to a decrease in export volumes.
The Reason states that a higher exchange rate makes exports relatively more expensive, reducing their competitiveness, which is also true and supports the Assertion. When the exchange rate is higher, it means that more units of the domestic currency are required to purchase a unit of foreign currency. This increases the price of exports in foreign currency terms, making them more expensive compared to goods produced in countries with weaker currencies.
Therefore, Both Assertion and Reason are true and provide a correct explanation.
Question : Assertion: Fluctuations in foreign exchange rates can impact a country's balance of trade.
Reason: A change in the exchange rate affects the competitiveness of a country's exports and imports.
Option 1:
Both Assertion and Reason are true and correct explanation
Question : Assertion: A depreciating currency can help boost exports.
Reason: A lower currency value makes exports cheaper for foreign buyers, increasing their demand.
Question : Assertion: A surplus in the current account leads to an increase in foreign exchange reserves.
Reason: Surplus in the current account implies that the inflow of foreign exchange exceeds the outflow.
Question : Assertion: Managed floating rate system is a hybrid of foreign exchange rate and a flexible exchange rate system.
Reason: Central Bank maintains reserves of foreign exchange under Managed Floating rate system to ensure that the exchange rate stays within the targeted value.
Question : Assertion: A decrease in tourism receipts can lead to an unfavorable balance of payments.
Reason: Tourism receipts are considered as invisible exports and contribute to the current account surplus.
Regular exam updates, QnA, Predictors, College Applications & E-books now on your Mobile