What is a floating exchange rate?

What is a floating exchange rate?

• A. The government fixes the currency's value against gold.
• B. The currency is pegged to another currency.
• C. The value is determined solely by supply and demand in the foreign exchange market.
• D. The central bank sets the rate at intervals.

Answer: (C)

Floating exchange rate means the currency’s value moves up or down based on supply and demand in the foreign exchange market. There isn’t a fixed target or peg set by the government, and no official rate tied to gold or another currency. Market participants trade currencies for reasons like trade balances, interest rate expectations, and risk, so the rate fluctuates with these forces. Central banks may intervene occasionally, but they don’t fix the rate in a floating regime. This is different from fixed or pegged systems where the value is tied to something specific and maintained at a set level.

Floating exchange rate means the currency’s value moves up or down based on supply and demand in the foreign exchange market. There isn’t a fixed target or peg set by the government, and no official rate tied to gold or another currency. Market participants trade currencies for reasons like trade balances, interest rate expectations, and risk, so the rate fluctuates with these forces. Central banks may intervene occasionally, but they don’t fix the rate in a floating regime. This is different from fixed or pegged systems where the value is tied to something specific and maintained at a set level.