Question

Under the flexible exchange rate system, the exchange rate is determined by the __________ .

(i) Government

(ii) Demand and supply

(iii) Intervention of the Central Bank

(Choose the correct option to fill in the blank)

• A. Only (i)
• B. Only (ii)
• C. Only (iii)
• D. (ii) and (iii)

Hint:

Under a flexible exchange rate, the market forces of demand and supply decide the rate, with no government or central bank role.

Answer 1

The Correct Option is B

Step 1: Recall the flexible exchange rate system:
The flexible (floating) exchange rate system lets the market decide the rate. The rate moves up and down with the demand for and supply of foreign exchange.
The government does not fix it.

Step 2: Test each item:
(i) Government: the government decides the rate only in the fixed system, so it is not a determinant here.
(ii) Demand and supply: this is the main feature of a flexible rate, so it is correct.
(iii) Intervention of the central bank: the central bank steps in only in the managed floating system, not in a pure flexible system.

Step 3: Pick the option:
Only (ii) applies, so the answer is option (B).
(A) Only (i) is the fixed system. (C) Only (iii) is the managed float. (D) (ii) and (iii) wrongly adds central bank intervention.

Final Answer:
The rate is determined by demand and supply. Option (B).