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 option d is correct.

1. Relevant knowledge points and concepts
- Exchange rate regimes: floating (flexible) vs fixed (pegged).  
- Floating rate: market forces (currency supply and demand, trade flows, capital flows, interest differentials, inflation expectations, speculation) set the price of a currency.  
- Fixed (pegged) rate: government or central bank actively intervenes to maintain a specific parity.  
- Interest rates are instruments of monetary policy and affect capital flows and exchange rates, but an “interest rate” itself is not a definition of an exchange rate regime.

2. Step-by-step reasoning
- Read each option and compare to the textbook definition of a floating exchange rate.  
- Option d states the rate “changes according to supply and demand, without government intervention,” which matches the standard definition of a flexible/floating regime.  
- Therefore option d aligns exactly with the concept.

3. Calculations/intermediate steps
- No numerical calculation is required. The solution is conceptual: match definitions to options.

4. Why the correct answer is correct
- In a floating system the exchange rate moves freely in response to market forces; central banks do not set or continually defend a specific rate. That is precisely what option d describes.

5. Why the other options are incorrect
- Option a: refers to an interest rate set by a central bank applying to more than one economy — this describes a common monetary policy or currency union feature, not an exchange rate regime.  
- Option b: describes a specific use of interest rates to stimulate the economy (monetary policy), not an exchange rate definition.  
- Option c: describes a fixed (pegged) exchange rate, the opposite of a floating regime.

6. Conclusion
- The correct choice is d. This matches the provided answer: d.

A floating (flexible) exchange rate isSingle choice

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