Which of the following is a feature of a flexible exchange rate system?
A. Exchange rate is fixed by government decree
B. No role for speculation
C. Exchange rate is determined by market forces of demand and supply of foreign exchange
D. Complete absence of central bank intervention in all cases
Answer: Option C
Solution (By JKSSB Mock Tests)
Under a pure flexible (floating) exchange rate system, the value of the currency is determined by the interaction of demand and supply in the foreign exchange market.
Explanation:
A currency board maintains a fixed exchange rate to an anchor currency, backs the entire monetary base with foreign reserves, and severely restricts the scope for discretionary monetary policy.
Explanation:
Modern Monetary Theory argues that a government that issues its own fiat currency cannot be forced into involuntary default and that the relevant constraint on spending is the availability of real resources and the risk of inflation.
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