Question : Which of the following is not a reason for a country to implement a floating exchange rate system?
Option 1: To promote trade
Option 2: To reduce currency manipulation
Option 3: To allow market forces to determine exchange rates
Option 4: To encourage foreign investment
Correct Answer: To reduce currency manipulation
Solution : The correct answer is (b) To reduce currency manipulation
Implementing a floating exchange rate system can actually help reduce currency manipulation. Under a floating exchange rate system, the value of a country's currency is determined by market forces, such as supply and demand. This makes it more difficult for countries to manipulate their currency to gain an unfair advantage in international trade.
Currency manipulation is more likely to occur under fixed exchange rate systems, where governments actively intervene in the foreign exchange market to influence the value of their currency.
