Question:
In a floating exchange rate system,
(1) the Balance of Payments will always be in surplus.
(2) the Balance of Payments will always be in deficit.
(3) completely insulate the economy from external forces.
(4) the exchange rate should adjust to equate demand and supply of foreign exchange.
(5) the government intervenes to influence the determination of the exchange rate.
Correct Answer:
(4)
Answer Explanation:
In a pure floating (flexible) exchange rate system, the central bank does not intervene. Instead, the value of the currency is determined entirely by free-market forces—the exchange rate automatically adjusts until the quantity of foreign exchange demanded equals the quantity supplied.
Topic: Exchange Rates Year: 2021
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