Which of the following statements is true of a flexible exchange rate system?

Question

Quizplus · Accepted Answer

In a flexible exchange rate system, market forces determine the value of a currency relative to others. Over time, supply and demand dynamics tend to push the exchange rate towards the level where the quantity of currency demanded equals the quantity supplied, also known as the market clearing level. Therefore, D is the correct answer. A and B are incorrect because market forces can cause both overvaluation and undervaluation of a currency depending on various factors such as interest rates, inflation rates, and political stability. C is incorrect because market forces do affect exchange rates between different currencies.

Which of the Following Statements Is True of a Flexible