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IAI Actuarial Core Principles · Business Economics · Balance of payments and exchange rates

Under a pure floating exchange rate regime, which statement best describes how the external value of a country's currency is determined?

Under a pure floating regime the exchange rate is determined by market demand and supply for the currency, with no official target or intervention. Fixed parities, currency boards and gold pegs describe fixed-rate systems, where authorities commit to defend a particular value.

  1. ABy the central bank, which announces a fixed parity and stands ready to defend it
  2. BBy the interaction of demand for and supply of the currency in the foreign exchange market, with no official commitment to a target rateCorrect
  3. CBy a currency board that backs every unit of domestic money with foreign reserves
  4. DBy the IMF, which sets parities for member countries each year
  5. By the government's decision to peg the currency to gold

Explanation

In a pure float the rate is set by market demand and supply for the currency. The authorities set no target rate and do not intervene. A fixed parity, currency board or gold peg are features of fixed regimes, not floating ones.

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