Exchange rate determined by market forces is called:
Options
AFixed Exchange Rate
BFloating Exchange Rate
CPegged Exchange Rate
DManaged Float
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International TradePYQ - July 2021 (Inter)Question 167 of 20
All Questions Correct Answer
✅ Option b — Floating Exchange Rate
All Options:
- AFixed Exchange Rate
- BFloating Exchange Rate
- CPegged Exchange Rate
- DManaged Float
Detailed Solution & Explanation
To determine the correct answer, let's break down the concept of exchange rates.
• The exchange rate is the price of one currency in terms of another currency.
• In a free market, the exchange rate is determined by the forces of supply and demand, which means it is not fixed by the government.
• This type of exchange rate is known as a floating exchange rate, where the value of a currency is determined by the foreign exchange market.
The correct answer is right because it aligns with the definition of a floating exchange rate, which is determined by market forces.
• On the other hand, a fixed exchange rate is incorrect because it is set by the government, not by market forces.
• A pegged exchange rate is also incorrect because although it is influenced by market forces, the government intervenes to maintain a specific value.
About This Chapter: International Trade
Paper
Paper 4: Business Economics
Weightage
10%
Key Topics
Theories, Trade Policy, Exchange Rates
This chapter explores trade between nations — why countries trade, the theories of Absolute and Comparative Advantage, Balance of Payments, Exchange Rate systems (Fixed vs Flexible), and India's trade policy including tariffs, quotas, and WTO rules.
View Official ICAI SyllabusExam Strategy Tip
Understand Comparative Advantage theory thoroughly — it's the foundation of international trade. Also focus on the Balance of Payments structure and what causes deficits.
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