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Question 35
If government policy allows a country’s currency to be determined in the exchange rate market, then that currency will
be subject to:
(A) a hard peg policy.
(B) purchasing power parity.
© depreciation.
(D) a floating exchange rate.

Ask by Ball Reeves. in the United States
Mar 30,2025

Solución de inteligencia artificial de Upstudy

Respuesta verificada por el tutor

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The currency will have a floating exchange rate.

Solución

  1. Since the government policy allows the currency to be determined in the exchange rate market, it is being allowed to float rather than being fixed or pegged.
  2. In a floating exchange rate regime, the value of the currency is determined by market forces such as supply and demand in the foreign exchange market.
  3. Therefore, the correct answer is:

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Beyond the Answer

When a country’s currency is determined by the exchange rate market without direct government control, it’s like letting the currency go for a swim in the financial pool! This means that its value can fluctuate based on supply and demand dynamics, making it highly responsive to economic events and investor sentiment.
Adopting a floating exchange rate can lead to exciting outcomes, but it can also create volatility for businesses involved in international trade. Companies have to be prepared for currency risk—like a rollercoaster ride! Hedging strategies, such as options and forwards, can help manage this risk, ensuring their financial balance remains intact amidst the fluctuations.

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