Chapter 8R, Problem 15MCQ

To determine

To find:

Name of the exchange rate which is determined by foreign exchange markets.

Explanation of Solution

When a country has a floating exchange rate, the foreign exchange market determines the value of its currency based on supply and demand in relation to other currencies. This contrasts with a fixed exchange rate, when the rate is fully or primarily decided by the government.

In other terms, a floating exchange rate keeps all essential economic factors constant in real terms, and by immediately offsetting foreign exchange swings, it may always maintain a positive balance in the balance of payments. On the other hand, because of its rapid fluctuations, it has a detrimental impact on the level of prices and the incidence of inflation.

Thus, from the above we can conclude that the correct option is C.