A 'floating exchange rate system' is one in which:
A)the central bank does not intervene to adjust the exchange rate.
B)shortages of foreign exchange will result in an appreciation of the domestic currency.
C)foreign exchange traders accept only a fixed price for their goods, regardless of the demand and supply for the currency.
D)the government defines its currency to be worth a certain amount in terms of another currency and ensures that the rate remains at that level.

Question

Quizplus · Accepted Answer

In a floating exchange rate system, the exchange rate is determined by the market forces of supply and demand without any intervention from the central bank. Therefore, option A is the correct choice. Option B is incorrect because a shortage of foreign exchange would result in a depreciation of the domestic currency, not an appreciation. Option C is incorrect because foreign exchange traders adjust their prices based on changes in supply and demand for the currency. Option D is incorrect because it describes a fixed exchange rate system, not a floating exchange rate system.

A 'Floating Exchange Rate System' Is One in Which