Consider the following statements 1 In the flexible exchange rate system the government does not nee...........

Economic Affairs Foreign Trade - Trends and Policy

Consider the following statements:

1.In the flexible exchange rate system the government does not need to maintain large stocks of foreign exchange reserves.

2.In flexible exchange rates the movements in the exchange rate automatically take care of the surpluses and deficits in the Balance of Payments.

3.In a fixed exchange rate system, governments will have to intervene to take care of the gap by use of its official reserves.

Which of the statements given above is/are correct?

1 only

2 and 3 only

2 only

1, 2 and 3

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Explanation:

1, 2 and 3

Option 4 (1, 2, and 3) is correct. In the flexible exchange rate system, governments don't need large forex reserves. Movements in exchange rates automatically address surpluses and deficits. In a fixed exchange rate system, governments must intervene, using official reserves to manage gaps.