A self-correcting mechanism tending to bring a country's balance of payments into equilibrium exists under __________ exchange rate systems.
A) fixed and floating
B) floating, but not fixed
C) fixed, but not floating
D) neither fixed nor floating

Question

Quizplus · Accepted Answer

Under a floating exchange rate system, the exchange rate is determined by the market forces of supply and demand. As a result, any imbalances in the balance of payments will lead to changes in the exchange rate, which in turn will impact the demand and supply of exports and imports, thereby helping to correct the imbalance. This mechanism is not present in fixed exchange rate systems since the rate is set by the government, and in such cases, other measures need to be taken to bring the balance of payments into equilibrium.

A Self-Correcting Mechanism Tending to Bring a Country's Balance of Payments