An exchange rate that varies according to the supply and demand for the currency in the foreign exchange market is called a(n)__________ exchange rate.

Question

Quizplus · Accepted Answer

A flexible exchange rate system allows the exchange rate to vary according to market forces of supply and demand. In this system, the value of a currency is not fixed and can be influenced by various factors such as inflation, interest rates, and political stability. Therefore, a flexible exchange rate is also known as a floating exchange rate. Options A and B (overvalued and undervalued) refer to the perceived value of a currency, which is subjective and not related to the exchange rate system. Option C (fixed exchange rate) refers to a system where the value of a currency is pegged to another currency or a basket of currencies, and the exchange rate is fixed. Option E (real exchange rate) refers to the exchange rate that reflects the relative prices of goods and services between two countries.

An Exchange Rate That Varies According to the Supply and Demand