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Question

The floating rate system is characterised by :

This question was previously asked in
UGC NET 2015 Paper 1 Question Paper (27-Dec-2015)
The correct answer is

the market forces that determine the exchange rate between two currencies.

Under a floating (flexible) exchange rate system the value of a currency is not fixed by any authority; it moves freely with the demand for and supply of that currency in the foreign exchange market.

So the exchange rate between two currencies is set by market forces such as trade flows, capital flows, interest rate differences and expectations.

A rate mutually agreed by central banks, a rate agreed between the IMF and its members, and realignment of par values all belong to fixed or pegged systems such as the Bretton Woods par value system, which floating rates replaced after 1973.

Hence, the answer is the market forces that determine the exchange rate between two currencies..

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