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.
Correct Answer: Market forces of supply and demand.
Solution : The correct answer is a) Market forces of supply and demand.
Under a floating exchange rate regime, the value of a currency is determined by the interaction of market participants, including individuals, businesses, financial institutions, and investors. The exchange rate adjusts based on the relative demand for and supply of a currency in the foreign exchange market.
Market forces such as economic fundamentals, interest rate differentials, inflation rates, capital flows, trade balances, and investor sentiment all contribute to the fluctuation of exchange rates in a floating exchange rate system.
While governments may occasionally intervene in the foreign exchange market to influence their currency's value, in a floating exchange rate system, their interventions are typically limited and aimed at smoothing extreme volatility rather than actively setting or fixing exchange rates.
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 : 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 : 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
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 : A ________ exchange rate is determined by the forces of supply and demand in the foreign exchange market.
Option 1: fixed
Option 2: floating
Option 3: managed
Option 4: pegged
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