Question : In a floating exchange rate system, exchange rates are determined by:
Option 1: Market forces of supply and demand
Option 2: Government intervention
Option 3: Central bank policies
Option 4: Fixed exchange rates
Correct Answer: Market forces of supply and demand
Solution : The correct answer is a) Market forces of supply and demand
In a floating exchange rate system, exchange rates are primarily determined by market forces of supply and demand. The exchange rate between two currencies in a floating system is determined by the interactions of buyers and sellers in the foreign exchange market. Factors such as trade flows, capital flows, interest rate differentials, economic indicators, geopolitical events, and market expectations influence the demand for and supply of currencies, thereby affecting their exchange rates.
Unlike in fixed exchange rate systems, where governments or central banks intervene to maintain specific exchange rates, in a floating exchange rate system, exchange rates are allowed to freely fluctuate based on market dynamics. The flexibility of a floating exchange rate system allows for adjustments to changing economic conditions and enables market participants to respond to economic factors and market forces.
Question : In a floating exchange rate system, the exchange rate is determined by market forces, and fluctuations in the rate are caused by changes in ________.
Option 1: government policies
Option 2: inflation rates
Option 3: interest rates
Option 4: supply and demand
Question : Which of the following exchange rate systems allows the exchange rate to be freely determined by market forces but with occasional central bank intervention?
Option 1: Crawling peg exchange rate
Option 2: Fixed exchange rate
Option 3: Floating exchange rate
Option 4: Managed float exchange rate
Question : In a floating exchange rate system, the value of a currency is primarily determined by:
Option 1: Central bank intervention
Option 2: Trade imbalances
Option 3: Market forces of supply and demand
Option 4: Government regulations
Question : Which of the following exchange rate systems allows the exchange rate to be determined solely by market forces of supply and demand?
Option 1: Fixed exchange rate
Option 2: Floating exchange rate
Option 3: Managed float exchange rate
Option 4: Pegged exchange rate
Question : In a floating exchange rate system, the exchange rate is primarily determined by:
Option 1: Market forces of supply and demand.
Option 2: Government interventions.
Option 3: Balance of trade.
Option 4: Interest rate differentials.
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