The correct matching is shown below: List I — Correct Match — List II 1. Equilibrium exchange rate point — → c — Intersection point 'e' 2. X-axis metric — → b — Quantity of US Dollars 3. Y-axis metric — → a — Exchange rate (Rs/$) 4. Effect of increased import demand — → d — Upward shift of demand curve Thus, the correct sequence is 1-c, 2-b, 3-a, 4-d. Hence, Option C is correct. Option A incorrectly matches the equilibrium point with the Y-axis. Option B incorrectly matches the X-axis with the equilibrium point and the Y-axis with the demand shift. Option D incorrectly matches almost all graphical elements.

The Assertion (A) is false because, under a completely flexible exchange rate system, the central bank does not maintain large foreign exchange reserves for the purpose of controlling the exchange rate. Since exchange rates are determined by market demand and supply, routine intervention is unnecessary. The Reason (R) is true because, in a completely flexible exchange rate system, central banks do not intervene in the foreign exchange market. This is the defining characteristic of a pure floating exchange rate system. Therefore, Assertion is false, while Reason is true, making Option D the correct answer.

When domestic citizens purchase more foreign goods and services, they require more foreign currency to make payments. This increases the demand for foreign exchange in the foreign exchange market. Graphically, the demand curve shifts rightward, while the supply curve remains unchanged. The new equilibrium is established at a higher exchange rate, meaning more domestic currency is required to purchase one unit of foreign currency. Therefore, Option A is correct. Option B is incorrect because an increase in imports raises, rather than reduces, the demand for foreign exchange. Option C is incorrect because increased imports affect the demand curve, not the supply curve. Option D is incorrect because there is no simultaneous proportional leftward shift in both curves.

When the rupee depreciates against the dollar: Statement 1 is correct because the value of the rupee in terms of dollars decreases. Statement 2 is correct because one dollar now costs more rupees, meaning the price of the dollar has increased. Statement 3 is incorrect because depreciation means more, not fewer, rupees are required to purchase one dollar. Therefore, the correct combination is Statements 1 and 2 only, making Option B the correct answer.

The logical sequence begins with the current exchange rate of Rs 80. Step 1: The current exchange rate is Rs 80 (3). Step 2: Investors expect the pound to appreciate to Rs 85 (1). Step 3: To earn future profits, they purchase pounds immediately (2). Step 4: The increased demand raises the present exchange rate (4). Thus, the correct sequence is: 3 → 1 → 2 → 4 Therefore, Option D is correct. Option A is incorrect because the exchange rate cannot increase before investors purchase pounds. Option B is incorrect because the exchange rate increase cannot occur before the expectation and buying. Option C is incorrect because investors cannot buy pounds before forming expectations.

When investors expect a foreign currency to appreciate, they begin purchasing it immediately to earn future gains. This increases the current demand for that currency. The increased demand pushes the exchange rate upward in the present, causing the expected appreciation to occur earlier. As a result, the investors' original belief contributes to creating the very outcome they anticipated. This phenomenon is known as a self-fulfilling expectation. Therefore, Option A is correct. Option B is incorrect because speculative buying occurs based on expectations, not after an official government announcement. Option C is incorrect because self-fulfilling appreciation results from market demand rather than compulsory central bank intervention. Option D is incorrect because speculative buying increases demand rather than decreasing it.

The Assertion (A) is true because when interest rates in Country B are higher than those in Country A (assuming equal risk), investors from Country A will invest in Country B to earn higher returns. To do so, they must first buy Country B's currency. The Reason (R) is also true because global capital markets are dominated by banks, multinational corporations, institutional investors, and wealthy individuals, who actively move funds across countries in search of higher interest rates. The Reason correctly explains why investors purchase Country B's currency when its interest rates are more attractive. Therefore, Option C is correct.

When domestic interest rates rise, domestic financial assets become more attractive relative to foreign assets. As a result: Foreign investors purchase more domestic currency to invest domestically, causing the demand curve for the domestic currency to shift rightward. Domestic investors prefer investing at home instead of abroad, so they exchange less domestic currency for foreign currency, causing the supply curve of the domestic currency to shift leftward. The combined effect is an appreciation of the domestic currency. Therefore, the correct answer is Option A (Right, Left). Option B describes the opposite movement and would lead to depreciation. Option C incorrectly suggests that both demand and supply increase simultaneously. Option D incorrectly suggests that both demand and supply decrease.

When a country's aggregate demand grows faster than that of the rest of the world, domestic consumers and firms purchase more goods and services, including imported goods. This increases the demand for foreign currency because import payments must be made in foreign currency. If the demand for foreign exchange increases faster than its supply, the exchange rate rises (more domestic currency is required per unit of foreign currency), resulting in a depreciation of the domestic currency. Therefore, Option C is correct. Option A is incorrect because faster domestic demand generally raises imports rather than exports. Option B is incorrect because growth in aggregate demand does not force the central bank to adopt a fixed exchange rate. Option D is incorrect because the exchange rate changes primarily due to changes in demand for foreign exchange, not self-fulfilling speculation in this situation.

The Assertion (A) is true because an increase in domestic income generally raises consumer spending, including expenditure on imported goods and services. The Reason (R) is false because higher imports increase the demand for foreign exchange, causing the demand curve to shift rightward, not leftward. A rightward shift increases the exchange rate and may lead to depreciation of the domestic currency rather than appreciation. Therefore, Option B is correct.

The Purchasing Power Parity (PPP) theory assumes that identical goods should sell for the same price across countries after accounting for exchange rates. For this to happen, goods must move freely across international markets. Therefore: Statement 1 is correct because the absence of tariffs allows prices to adjust freely. Statement 2 is correct because the absence of quotas permits unrestricted international trade. Statement 3 is incorrect because heavy central bank intervention distorts exchange rates and prevents them from adjusting according to relative price levels. Hence, Statements 1 and 2 only are correct, making Option D the correct answer.

According to the Purchasing Power Parity (PPP) theory, the equilibrium exchange rate equals the ratio of the domestic price to the foreign price of the same good. Using the updated prices: Price in India = Rs 480 Price in the US = $12 [ \text{Exchange Rate}=\frac{480}{12}=40 ] Therefore, 1 US Dollar = Rs 40 Hence, Option A is correct. Option B is incorrect because Rs 50 per dollar would imply the shirt costs Rs 600 in India (12 × 50), which does not match the given price. Option C is incorrect because Rs 60 per dollar would imply an Indian price of Rs 720. Option D is incorrect because Rs 80 per dollar would imply an Indian price of Rs 960.

The correct matching is shown below: List I — Correct Match — List II 1. Higher exchange rate fixed by Govt (e₁ > e) — → d — Devaluation 2. Lower exchange rate fixed by Govt (e₂ < e) — → a — Revaluation 3. Market determined rate — → b — Equilibrium point e 4. Excess supply of dollars at rate e₁ — → c — RBI intervenes to absorb it Thus, the correct sequence is 1-d, 2-a, 3-b, 4-c. Hence, Option C is correct. Option A incorrectly matches devaluation and revaluation. Option B incorrectly matches the market-determined rate and higher fixed exchange rate. Option D incorrectly pairs almost every concept.

When the government fixes the exchange rate below the market equilibrium (e₂ < e), foreign currency becomes relatively cheaper. As a result, the quantity of dollars demanded exceeds the quantity supplied, creating an excess demand for dollars. To maintain the fixed exchange rate and prevent the emergence of a black market, the RBI supplies dollars from its foreign exchange reserves (past holdings) to satisfy the excess demand. Therefore, Option A is correct. Option B is incorrect because purchasing dollars would further reduce the supply of dollars in the market and worsen the shortage. Option C is incorrect because the question asks how the government maintains the existing fixed exchange rate, not how it changes the exchange rate. Option D is incorrect because lowering interest rates does not directly eliminate the immediate excess demand for dollars.

Devaluation is the deliberate increase in the exchange rate by the government under a fixed exchange rate system. This reduces the value of the domestic currency relative to foreign currencies. As a result: Domestic goods become cheaper for foreign buyers. Exports become more competitive. Export demand increases, helping improve the Balance of Payments and stimulate domestic production. Therefore, Option B is correct. Option A is incorrect because devaluation makes foreign goods more expensive, not cheaper, for domestic consumers. Option C is incorrect because reducing foreign exchange reserves is not the objective of devaluation. Option D is incorrect because devaluation makes foreign travel more expensive for domestic residents.

Revaluation is the deliberate reduction of the official exchange rate by the government under a fixed exchange rate system. This means fewer units of domestic currency are required to purchase one unit of foreign currency, increasing the value of the domestic currency. As a result: The domestic currency becomes costlier (stronger). Imports become relatively cheaper. Exports become relatively more expensive in foreign markets. Therefore, Option C is correct. Option A is incorrect because revaluation is a government action, whereas appreciation occurs through market forces. Option B is incorrect because increasing the exchange rate is devaluation, not revaluation. Option D is incorrect because speculation refers to investor expectations rather than official exchange rate policy.

Under a flexible exchange rate system, exchange rates adjust automatically according to the demand and supply of foreign exchange. Since the central bank does not need to intervene continuously to defend a fixed exchange rate, it is free to use monetary policy to achieve domestic goals such as controlling inflation, promoting economic growth, and maintaining employment. Therefore, Option D is correct. Option A is incorrect because the Bretton Woods System was a fixed exchange rate system that limited monetary policy independence. Option B is incorrect because constant adjustment of interest rates to maintain a peg is characteristic of a fixed exchange rate system. Option C is incorrect because flexible exchange rates do not restrict international trade.

A speculative attack occurs when investors believe that a government or central bank cannot continue defending a fixed exchange rate because its foreign exchange reserves are inadequate. Anticipating a future devaluation, investors rapidly sell the domestic currency and buy foreign currency. This increases pressure on the central bank's reserves and can ultimately force the government to abandon the fixed exchange rate. Therefore, Option D is correct. Option A is incorrect because a Balance of Payments surplus generally strengthens the country's external position rather than triggering speculation. Option B is incorrect because speculative attacks are associated with fixed exchange rate systems, not freely floating exchange rates. Option C is incorrect because a speculative attack usually occurs before a forced devaluation, not after a successful devaluation.

The passage explains that a managed floating exchange rate system (also called dirty floating) allows central banks to buy and sell foreign currencies whenever they consider intervention necessary to moderate exchange rate fluctuations. Because these interventions involve the use of official foreign exchange reserves, official reserve transactions are not equal to zero. Therefore, Option B is correct. Option A is incorrect because reserve transactions occur whenever the central bank intervenes. Option C is incorrect because managed floating exists without any formal international agreement prohibiting such transactions. Option D is incorrect because managed floating has no connection with the gold standard.

According to the passage, in a dirty floating (managed floating) system, the central bank intervenes by buying and selling foreign currencies whenever it considers such action appropriate. The purpose of these interventions is not to permanently fix the exchange rate, but to moderate excessive fluctuations and maintain orderly conditions in the foreign exchange market. Therefore, Option A is correct. Option B is incorrect because maintaining a permanently fixed exchange rate is a feature of a fixed exchange rate system, not managed floating. Option C is incorrect because central bank intervention does not eliminate international trade. Option D is incorrect because the objective is exchange rate stability, not continuous depreciation.