Question

Read the following statements carefully:
Statement 1: Depreciation of currency is an economic action undertaken by the government of a nation under the fixed exchange rate system.
Statement 2: Under the floating exchange rate system, authorities actively intervene in the foreign exchange market by way of maintaining foreign exchange reserves.

• A. Statement 1 is true and statement 2 is false.
• B. Statement 1 is false and statement 2 is true.
• C. Both statements 1 and 2 are true.
• D. Both statements 1 and 2 are false.

Hint:

In a fixed exchange rate system, the government or central bank controls the currency value, while in a floating exchange rate system, the market determines it, with possible government interventions to maintain stability.

Answer 1

The Correct Option is B

Step 1: Evaluating Statement 1.
"Depreciation" refers to a fall in the value of a currency due to market forces of supply and demand in a flexible/floating system. If a government intentionally lowers the value of its currency in a fixed system, it is called "Devaluation." Thus, Statement 1 is false.
Step 2: Evaluating Statement 2.
In a pure floating exchange rate system, the value is determined entirely by the market without central bank interference. When authorities intervene using reserves to influence the rate, it is known as a "Managed Float" or "Dirty Floating," not a standard floating system. Thus, Statement 2 is false.
Step 3: Conclusion.
Both statements confuse the terminology associated with different exchange rate regimes.
Final Answer: Both statements 1 and 2 are false.