In the floating exchange rate system, government officials must intervene in the foreign exchange market to keep the exchange rate from fluctuating.

Question

Quizplus · Accepted Answer

In a floating exchange rate system, the exchange rate is allowed to fluctuate based on market forces of supply and demand. Government intervention is not necessary to maintain a fixed exchange rate. However, governments may choose to intervene in the foreign exchange market for other reasons, such as to control inflation or to influence their domestic economy.

In the Floating Exchange Rate System, Government Officials Must Intervene