Governments that believe in a free market approach usually adopt floating exchange rate policies.

Question

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A free market approach typically means that the government does not intervene in the exchange rate and allows the market forces to determine the value of the currency. This is achieved through a floating exchange rate policy. Governments that believe in free market principles prefer to leave exchange rates to be determined by market forces, and hence adopt floating exchange rate policies. This is because they believe that free markets allocate resources efficiently and can self-correct any imbalances. In contrast, governments that believe in managed exchange rates may intervene in currency markets to influence the value of their currency.

Governments That Believe in a Free Market Approach Usually Adopt