Question:
Floating exchange rates refer to
(1) the exchange rates failing to adjust when distabilized by shocks to the foreign exchange market.
(2) exchange rates maintained by the government through the interventions in the exchange market.
(3) exchange rates determined by the demand for and supply of a country’s currency.
(4) a situation where the excess demand for a country’s currency causes its devaluation.
(5) a situation where the excess supply of a country’s currency causes its appreciation.
Correct Answer:
(3)
Answer Explanation:
In a pure floating (or flexible) exchange rate system, the value of the currency is allowed to fluctuate freely. It is determined entirely by free-market forces—specifically, the intersection of the market demand for, and supply of, the currency in the foreign exchange market, without Central Bank intervention.
Topic: Exchange Rates Year: 2020
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