Answer (B) is correct . Exchange rates “float” when they are set by supply and demand, not by agreement among countries. In a managed float, central banks buy and sell currencies at their discretion to avoid erratic fluctuations in the foreign currency market. The objective of such transactions is to “manage” the level at which a particular currency sells in the open market. For instance, if there is an oversupply of a country’s currency on the foreign currency market, the central bank will purchase that currency to support the market.
Answer (A) is incorrect because Currencies do not have an inherent tendency to depreciate or appreciate.
Answer (C) is incorrect because Currencies no longer have to be supported by gold.
Answer (D) is incorrect because Central banks, not private business people, manage the quantity of currency on the market.
|
