Question : In a floating exchange rate system, the value of a currency is primarily determined by:
Option 1: Central bank intervention
Option 2: Trade imbalances
Option 3: Market forces of supply and demand
Option 4: Government regulations
Correct Answer: Market forces of supply and demand
Solution : The correct answer is c) Market forces of supply and demand
In a floating exchange rate system, the value of a currency is primarily determined by market forces of supply and demand in the foreign exchange market. The exchange rate between two currencies is determined by the interactions of buyers and sellers who exchange one currency for another. Factors such as changes in interest rates, inflation rates, economic performance, trade imbalances, and investor sentiment can influence the demand for and supply of a currency, thereby affecting its value in the foreign exchange market.
