Under ____________ there is no interference of monetary authorities to decide exchange rate.

The correct answer is B. Floating. In a floating exchange rate system, there is no interference by monetary authorities to determine or fix exchange rates. Instead, exchange rates are determined by market forces, such as supply and demand for currencies in the foreign exchange market. Let’s explore in detail why this answer is correct and why the other options, A, C, and D, are not:

B. Floating –

This option is correct because in a floating exchange rate system, exchange rates are market-driven, and there is no direct intervention or interference by monetary authorities to set or control the exchange rate.

In this system, currencies are allowed to fluctuate freely based on the economic and financial conditions of the countries involved. The exchange rate is determined by the willingness of market participants to buy and sell currencies at a given rate.

Now, let’s examine why the other options are not correct:

A. Fixed –

This option is incorrect because in a fixed exchange rate system, exchange rates are indeed determined and fixed by monetary authorities, such as central banks or governments.

In a fixed system, these authorities actively intervene to maintain the established exchange rate by buying or selling their own currency in the foreign exchange market. This intervention is a key feature of fixed exchange rate systems, in contrast to the lack of intervention in floating systems.

C. Both of these –

This option is incorrect because it implies that both fixed and floating exchange rate systems lack interference by monetary authorities, which is not accurate. In reality, fixed exchange rate systems involve active intervention by monetary authorities to maintain the fixed rate, while floating exchange rate systems are characterized by the absence of such interference.

D. Fixing –

This option is incorrect because it does not accurately describe an exchange rate system. “Fixing” is a term that can refer to the process of setting the exchange rate, which occurs in fixed exchange rate systems but not in floating systems. It does not represent a distinct exchange rate regime on its own.

In a floating exchange rate system, exchange rates are primarily determined by market forces, reflecting a currency’s perceived value in relation to other currencies.

Several factors influence exchange rates in this system, including interest rates, inflation rates, economic data, political stability, and market sentiment. Traders and investors buy and sell currencies based on their expectations of these factors, leading to fluctuations in exchange rates.

Floating exchange rates provide flexibility to adjust to changing economic conditions and external shocks. Central banks and monetary authorities do not actively intervene to maintain or target specific exchange rates. This system allows for an automatic adjustment mechanism where exchange rates respond to economic changes, contributing to external balance and equilibrium in trade.

In contrast, fixed exchange rate systems involve central banks or governments setting and actively maintaining specific exchange rates by buying or selling their own currencies in the foreign exchange market. Fixed systems are often used to promote stability and predictability in international trade, but they require continuous intervention to uphold the fixed rate.

In summary, the correct answer is B. Floating, as in a floating exchange rate system, there is no interference by monetary authorities to decide exchange rates. Exchange rates are determined by market forces in response to various economic and financial factors. This stands in contrast to fixed exchange rate systems, where central banks or governments actively intervene to maintain specific exchange rates.