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

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 Assertion and Reason are true and correct explanation.

Fluctuations in foreign exchange rates can indeed impact a country's balance of trade. When the exchange rate of a country's currency changes, it affects the relative prices of its exports and imports. If the domestic currency appreciates (increases in value) against other currencies, it makes the country's exports more expensive for foreign buyers, potentially leading to a decrease in export demand. At the same time, it makes imports cheaper, which can increase import demand. This situation can result in a deterioration of the country's balance of trade, leading to a trade deficit.

The Reason provided also correctly explains why fluctuations in foreign exchange rates impact the balance of trade. Changes in the exchange rate affect the competitiveness of a country's exports and imports. A stronger domestic currency makes exports relatively more expensive and imports relatively cheaper, which can affect the demand for and competitiveness of a country's goods and services in international markets.

Therefore, both the Assertion and Reason are true, and the Reason provides a correct explanation for the impact of foreign exchange rate fluctuations on a country's balance of trade.