Flexible exchange rates occur when
A) speculators bet that a currency will soon depreciate.
B) governments and central banks spend foreign exchange to prop an exchange rate at a certain level.
C) no one knows the true value of a currency.
D) exchange rates are determined by forces of supply and demand.

Question

Quizplus · Accepted Answer

Flexible exchange rates are determined by market forces of supply and demand, meaning that the exchange rate is able to fluctuate freely according to changes in the market. Governments and central banks do not intervene to prop up or manipulate the exchange rate, as they do in a fixed exchange rate system. While speculation can influence exchange rates, it is not the defining characteristic of a flexible exchange rate system.

Flexible Exchange Rates Occur When