A floating (flexible) exchange rate is

Question

BlackTom AI · Accepted Answer

A floating exchange rate is determined by supply and demand in the foreign exchange market, so the correct choice is c: "a currency exchange rate that changes according to supply and demand, without government intervention in the currency market."

1. Relevant knowledge points and concepts
- Exchange rate regimes: fixed (pegged) vs floating (flexible).  
- In a floating system, the price of one currency in terms of another moves in response to market forces (trade flows, capital flows, interest rate differentials, expectations).  
- Governments/central banks can intervene to peg a currency (fixed rate) or to smooth volatility (managed/dirty float), but a pure floating rate involves no systematic intervention.

2. Step-by-step reasoning
- Read each option and identify whether it defines an exchange rate regime or an interest rate.  
- Option c describes a rate that "changes according to supply and demand" and explicitly states "without government intervention" — this matches the textbook definition of a floating (flexible) exchange rate.  
- Options b and d refer to interest rates (not exchange rates), so they are category mismatches.  
- Option a describes a rate "fixed at a particular rate through government intervention," which is the definition of a fixed (pegged) exchange rate — the opposite of floating.

3. Calculations
- No numerical calculation is required for this conceptual question.

4. Why the correct answer is correct
- Floating (flexible) exchange rates fluctuate because market participants buy and sell currencies based on economic fundamentals and expectations; without government action to maintain a parity, the rate moves freely — exactly as option c states.

5. Why the other options are incorrect
- a: Describes a fixed/pegged exchange rate (opposite of floating).  
- b and d: Describe interest rates set by central banks, not exchange rates; they therefore do not define an exchange rate regime.

Conclusion
The explanation confirms option c is correct: a floating (flexible) exchange rate is one that changes according to supply and demand without government intervention.

A floating (flexible) exchange rate isSingle choice

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