Which statement about exchange-rate regimes is true?

Which statement about exchange-rate regimes is true?

• A. A floating rate means the government fixes the value.
• B. A pegged floating rate implies the currency is never subject to market forces.
• C. A fixed rate ties the currency to another major currency or a basket.
• D. A fixed rate is determined by supply and demand in the market.

Answer: (C)

Understanding exchange-rate regimes means recognizing whether a country lets its currency move with market forces or keeps it tied to a reference value. A fixed rate is defined by the currency being anchored to another major currency or a basket of currencies, with the central bank actively defending that target value through intervention and reserves. This setup provides stability for prices and trade, because the value stays put relative to the reference, rather than drifting with daily market moves. Why this is the best description: tying the currency to a specific currency or basket is exactly what a fixed rate does. The peg is maintained by policy actions to ensure the value stays at the chosen level, rather than allowing it to freely fluctuate. Why the other statements don’t fit: a floating rate means the value is determined by supply and demand in the market, not fixed by the government. A pegged system can still experience market pressure and requires intervention to maintain the peg, so it’s not correct to say the currency is never subject to market forces. And a fixed rate isn’t set purely by supply and demand; it is established and defended by authorities, with the market reacting to policy rather than setting the rate on its own.

Understanding exchange-rate regimes means recognizing whether a country lets its currency move with market forces or keeps it tied to a reference value. A fixed rate is defined by the currency being anchored to another major currency or a basket of currencies, with the central bank actively defending that target value through intervention and reserves. This setup provides stability for prices and trade, because the value stays put relative to the reference, rather than drifting with daily market moves.

Why this is the best description: tying the currency to a specific currency or basket is exactly what a fixed rate does. The peg is maintained by policy actions to ensure the value stays at the chosen level, rather than allowing it to freely fluctuate.

Why the other statements don’t fit: a floating rate means the value is determined by supply and demand in the market, not fixed by the government. A pegged system can still experience market pressure and requires intervention to maintain the peg, so it’s not correct to say the currency is never subject to market forces. And a fixed rate isn’t set purely by supply and demand; it is established and defended by authorities, with the market reacting to policy rather than setting the rate on its own.