Question

Read the following statements – Assertion and Reason (R). Choose the correct option from those given below: Assertion : Increase in exchange rate implies that the price of foreign currency in terms of domestic currency has increased. Reason (R): Balance of trade records the inflows and outflows of goods.

• A. Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
• B. Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).
• C. Assertion (A) is false, but Reason (R) is true.
• D. Assertion (A) is false and Reason (R) is true.

Hint:

Increase in exchange rate indicates depreciation of domestic currency, making foreign goods costlier.

Answer 1

The Correct Option is B

Step 1: Understanding the Concept:
The exchange rate is the price of one currency in terms of another.
The Balance of Trade (BoT) is a component of the Balance of Payments.
Step 2: Detailed Explanation:
Analysis of Assertion (A): By definition, an increase in the exchange rate (e.g., from \(1\$ = ₹70\) to \(1\$ = ₹80\)) means foreign currency has become more expensive. This is true.
Analysis of Reason (R): Balance of trade is indeed the difference between the value of exports and imports of physical goods (visible items). This is also true.
Relationship: While both statements are factually correct, the definition of BoT (Reason) does not explain why the exchange rate is defined as the price of foreign currency (Assertion).
Step 3: Final Answer:
Both statements are true independently, but there is no logical link where the Reason explains the Assertion.