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.
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 explanations.
The assertion states that the managed floating rate system is a hybrid of fixed exchange rate and flexible exchange rate systems, which is true. In a managed floating rate system, the exchange rate is allowed to fluctuate based on market forces, but the central bank also intervenes in the foreign exchange market to influence the exchange rate when necessary.
The reason provided states that the central bank maintains reserves of foreign exchange to ensure that the exchange rate stays within the targeted value, which is also true. The central bank can use its foreign exchange reserves to buy or sell its currency in the market and influence the exchange rate. By doing so, the central bank aims to manage the fluctuations in the exchange rate and maintain stability within certain limits.
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