Question

Currently, the foreign exchange rate for all world currencies is A) a fixed exchange rate, based on the U.S. Dollar. B) a floating exchange rate, based on the U.S. Dollar. C) a fixed exchange rate, based on market forces of supply and demand. D) a floating exchange rate, based on market forces of supply and demand.

Answer 1

D) a floating exchange rate, based on market forces of supply and demand.

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Answer 2

The correct answer is D.

The Bretton Woods system, which tried to resemble the Gold Standard was suspended by President Nixon in 1971. After the failure of such worlwide systems that aimed to fix the values of currencies to one another, a new international monetary order has been established.

Currently, the values of currencies are allowed to fluctuate freely attending to the foreign-exchange market mechanisms to its demand and supply forces. Hence, for example, a currency depreciates if the amount supplied is larger than the amount demanded by foreign investors.