CA Foundation · Business Economics · International Trade
Under a flexible (floating) exchange rate system, the rate between the rupee and the US dollar is determined mainly by:
Under a floating exchange rate system the rate is determined by the demand for and supply of foreign exchange in the market. Governments do not fix it by announcement or gold parity. Changes in demand or supply therefore move the rupee-dollar rate up or down.
- AThe decision of the Finance Ministry announced every year
- BThe demand for and supply of foreign exchange in the marketCorrect
- CA fixed parity with gold maintained by the central bank
- DThe level of customs duties imposed on imports
Explanation
In a floating system the exchange rate is the price of one currency in terms of another and is set by market forces, namely demand for and supply of foreign exchange. Fixed gold parity describes the gold standard, and an announced rate describes a fixed or pegged system. Tariffs may influence demand but do not determine the rate.
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