Which of the following exchange rates is determined by the market forces of demand and supply?
Show answer & explanation
Correct answer: B
Explanation
The correct answer is option 2 i.e. Floating exchange rate.
The floating exchange rate is determined by market forces of demand and supply.
In this system, the value of a currency fluctuates based on foreign exchange market dynamics, influenced by factors like trade balances, inflation, interest rates, and investor sentiment.
Governments or central banks do not intervene significantly, allowing the rate to adjust freely. This contrasts with a fixed exchange rate, where authorities peg the currency to another and actively manage its value.
Floating rates reflect real-time economic conditions, promoting automatic balance-of-payments adjustments. Most major currencies, like the US dollar and euro, operate under a floating exchange rate system.