Question : Assertion: In case of Floating Exchange rate system currency price of a nation is set by the forex market based on supply and demand relative to other currencies.
Reason: Government intervenes in the foreign exchange market under Floating Exchange rate system to restrict the fluctuations in the exchange rate within certain limits.
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: Assertion is true but Reason is false
Solution : The correct answer is c) The assertion is true, but the reason is false.
In a floating exchange rate system, the currency price of a nation is indeed set by the foreign exchange market based on the supply and demand relative to other currencies. The exchange rate is determined by market forces such as trade flows, capital flows, and investor sentiment.
However, the reason provided is incorrect. Under a floating exchange rate system, the government generally does not intervene in the foreign exchange market to restrict fluctuations in the exchange rate within certain limits. The exchange rate is allowed to fluctuate freely based on market forces without government intervention.
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