Question : Assertion: Central banks play a significant role in managing and influencing foreign exchange rates.
Reason: Central banks can intervene in the foreign exchange market to stabilize or manipulate their country's currency value.
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:
Solution : The correct answer is(a) Both Assertion and Reason are true and correct explanation.
Central banks do play a significant role in managing and influencing foreign exchange rates. The Reason provided correctly explains that central banks have the ability to intervene in the foreign exchange market to stabilize or manipulate their country's currency value. Central banks can buy or sell their own currency in the foreign exchange market to influence its supply and demand, thereby impacting its exchange rate relative to other currencies. They can also use various monetary policy tools, such as interest rate adjustments, to influence investor sentiment and affect the value of their currency.
Therefore, both the Assertion and Reason are true, and the Reason provides a correct explanation for the significant role played by central banks in managing and influencing foreign exchange rates.
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.
Question : Assertion: Devaluation of Domestic currency refers to rise in National Income of domestic country.
Reason: Devaluation of Domestic currency refers to reduction in the value of domestic currency with respect to foreign currency, under fixed exchange rate system.
Question : Assertion: An increase in interest rates can attract foreign capital inflows.
Reason: Higher interest rates provide higher returns on investments, attracting foreign investors.
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: Appreciation of a country's currency can have a negative impact on its tourism industry.
Reason: A stronger currency makes traveling to the country more expensive for foreign tourists.
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