Question : Which of the following is not a reason for a country to implement a floating exchange rate system?
Option 1: To allow market forces to determine exchange rates
Option 2: To promote international trade
Option 3: To reduce currency risk
Option 4: To maintain low inflation
Correct Answer: To promote international trade
Solution : The correct answer is (b) To promote international trade.
While a floating exchange rate system can have an impact on international trade, it is not the primary reason for implementing such a system. The main reasons for a country to implement a floating exchange rate system include:
a) To allow market forces to determine exchange rates: A floating exchange rate system allows the currency's value to be determined by the supply and demand in the foreign exchange market, providing flexibility and adjustment to changing economic conditions.
c) To reduce currency risk: In a floating exchange rate system, the currency's value can fluctuate, introducing currency risk for international transactions. However, a floating exchange rate system does not directly aim to reduce currency risk.
d) To maintain low inflation: A floating exchange rate system can help a country adjust to inflationary pressures by allowing the currency's value to fluctuate in response to changing economic conditions. This flexibility can contribute to maintaining low inflation levels.
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