Question : Assertion: An increase in the exchange rate can lead to an increase in aggregate supply.
Reason: A higher exchange rate makes imports more expensive, thereby encouraging domestic production and increasing aggregate supply.
Option 1: Both Assertion and Reason are correct, and the Reason is the correct explanation of the Assertion.
Option 2: Both Assertion and Reason are correct, but the Reason is NOT the correct explanation of the Assertion.
Option 3: Assertion is correct, but the Reason is incorrect.
Option 4: Assertion is incorrect, but the reason is correct
Correct Answer:
Both Assertion and Reason are correct, but the Reason is NOT the correct explanation of the Assertion.
Solution : The correct answer is (B).Both Assertion and Reason are correct, but the Reason is NOT the correct explanation of the Assertion.
The assertion is correct. When the exchange rate increases, it means that the value of the domestic currency has decreased relative to foreign currencies. This makes imported goods more expensive for domestic consumers. As a result, domestic consumers may switch to buying domestically produced goods. This increased demand for domestically produced goods can lead to an increase in aggregate supply.
However, the reason is not the correct explanation of the assertion. The reason states that a higher exchange rate makes imports more expensive, thereby encouraging domestic production and increasing aggregate supply. This is true, but it is not the only reason why an increase in the exchange rate can lead to an increase in aggregate supply.
Therefore, both the assertion and the reason are correct, but the reason is not the correct explanation of the assertion.
