Consider the following statements I. The Exchange Rate Mechanism (ERM) of the International Monetary Fund (IMF) facilitates curre…

Economy ·Previously asked in JKPSC Combined Competitive Examination (JKCCE) 2025

View the full solved paper: GS Paper I (Set B)

Question

Consider the following statements:

I. The Exchange Rate Mechanism (ERM) of the International Monetary Fund (IMF) facilitates currency convertibility among member countries.

II. Under a flexible foreign exchange rate system, the need for balance of payments adjustments through foreign exchange reserves is reduced.

Which of the statements given above is/are correct?

  1. A. I only
  2. B. II only (Correct answer)
  3. C. Both I and II
  4. D. Neither I nor II

Correct Answer

Option B — II only

Detailed Solution & Explanation

The correct answer is II only.

Key Points

  • Statement I is incorrect: the Exchange Rate Mechanism (ERM) is a European Union mechanism (formerly European Monetary System), not an IMF instrument.
  • Statement II is correct: under a flexible exchange rate system, market forces automatically adjust the exchange rate, reducing the need for large foreign exchange reserves to finance balance-of-payments deficits.