Final answer:
The fundamental value of a currency is determined by supply and demand and is not based on intrinsic worth. Trust and confidence play a significant role in the value of fiat money.
A central bank can allow a currency to fall indefinitely, but cannot let it rise indefinitely due to the negative impact on exports.
Step-by-step explanation:
The fundamental value of a currency is determined by its supply and demand. When there is high demand and low supply, the value of the currency increases, whereas low demand and high supply can cause the value to decrease. The value of a currency is not based on its intrinsic worth, but rather on the faith and trust placed in it by people.
Fiat money, which is the type of money used by most countries today, has no intrinsic value and is declared legal tender by a government.
The value of fiat money is based on the trust and confidence people have in the government's backing and the stability of the economy.
A central bank, which is responsible for managing a country's currency and monetary policy, can allow the currency to fall indefinitely by not interfering in the foreign exchange markets.
However, it cannot allow the currency to rise indefinitely because a highly valued currency can make a country's exports more expensive and less competitive in the global market.