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Read the following… (Class 12 Economics SQP 2025-26, Q4)

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EconomicsCBSE Class 12 · Sample paper, session 2025-26 · 1 mark · MCQ

CBSE Class 12 Economics sample paper 2025-26: question 4

From the official CBSE sample question paper for 2025-26, section A, question 4, for 1 mark. Try it first; the hints and our step-by-step solution are below.

Q4 · 1 mark · MCQOpen Economy Macroeconomics

Read the following statements carefully:
Statement 1: Devaluation of currency is said to occur when the exchange rate is decreased under the Fixed Exchange Rate System.
Statement 2: Under the Floating Exchange Rate System, competent authorities do not maintain foreign exchange reserves.
In light of the given statements, choose the correct option from the following:

  1. (A)Statement 1 is true and Statement 2 is false.
  2. (B)Statement 1 is false and Statement 2 is true.
  3. (C)Both Statements 1 and 2 are true.
  4. (D)Both Statements 1 and 2 are false.

Source: official sample paper from cbseacademic.nic.in (PDF). See it in the full Sample paper 2025-26.

Hints

Open one hint at a time and try again before the next.

Hint 1

If ₹ 80 = 1, has the exchange rate risen or fallen?

Hint 2

Who sets the rate under a free float?

Step-by-step solution

Each step shows the marks it earns, as an examiner would award them. Checked by an independent re-solve from the question paper.

  1. Statement 1 is false: devaluation under a fixed exchange rate system is an official increase in the exchange rate (the domestic currency price of foreign currency rises), which lowers the value of the domestic currency.

  2. Statement 2 is true: under a (pure) floating system the rate is set by market demand and supply, and the authorities do not intervene, so they need not maintain foreign exchange reserves for that purpose. Option (B).

    1 mark

Answer: (B) Statement 1 is false and Statement 2 is true.

Where the marks are

  • Devaluation raises the exchange rate; no reserves needed under a free float (1 mark)

Revise the chapter

Practise this chapterBoard-style questions from Open Economy Macroeconomics, one at a time, marked against the answer key and marking points.Back to the full paperSample paper 2025-26: every question, by section.

The question is transcribed from the official paper; figures are described in words. The solution, hints and chapter tag are ours. Spotted an error? Write tosupport@questionbuddy.in.