What determines a floating exchange rate?

• A. Government intervention
• B. Market forces
• C. Commodity standards
• D. Set economic benchmarks

Answer: (B)

A floating exchange rate is primarily determined by market forces, which include supply and demand dynamics for currencies in the foreign exchange market. In a floating exchange rate system, currency values fluctuate freely based on various factors such as interest rates, inflation rates, political stability, economic performance, and market speculation.

When market forces are in play, the value of a currency can change continually as traders buy and sell currencies in response to changes in economic conditions or geopolitical events. This flexibility allows the currency to reflect real-time economic conditions rather than being fixed at a set value by any central authority.

In contrast, government intervention can lead to a fixed or pegged exchange rate rather than a floating one, while commodity standards and set economic benchmarks are more relevant to stable or fixed exchange rate scenarios rather than market-driven fluctuations. Thus, understanding how supply and demand within the currency market influences exchange rates is crucial to grasping the concept of floating exchange rates.