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Q95 (CDS-I/2021) Economy › External Sector & Trade › Exchange rate dynamics Answer Verified

Exchange rates state the value of one currency in terms of other currencies. Which one of the following statements with respect to the exchange rate of currency is correct ?

Result
Your answer: —  Â·  Correct: B
Explanation

Exchange rate regimes are primarily classified into fixed and floating systems. A fixed exchange rate is one that is set by government or central bank decisions and maintained through active government actions, such as market intervention, to ensure stability in foreign trade [4]. In contrast, floating exchange rates are determined by the market forces of demand and supply, theoretically without government interference [4]. Regarding historical systems, the Bretton Woods system (1944–1971) involved currencies being pegged to the US dollar, which was itself anchored to gold at $35 per ounce, rather than floating based on gold prices [2]. Under the classical gold standard, currencies were fixed directly in terms of gold, not the dollar. Therefore, option 2 is the only accurate description of a currency regime's fundamental mechanism as defined in standard economic theory.

Sources

  1. [1] India and the Contemporary World – II. History-Class X . NCERT(Revised ed 2025) > Chapter 3: The Making of a Global World > New words > p. 77
  2. [3] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 17: India’s Foreign Exchange and Foreign Trade > CHAPTER SUMMARY > p. 507
  3. [4] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 6: Open Economy Macroeconomics > National Income Identity for an Open Economy > p. 102
  4. [2] India and the Contemporary World – II. History-Class X . NCERT(Revised ed 2025) > Chapter 3: The Making of a Global World > 4.1 Post-war Settlement and the Bretton Woods Institutions > p. 75
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