Question

In 2018, investors worried about the uncertainty in the turkish economy, began exchanging their lira investments for u.s. dollars. under a floating exchange rate system, how is the value of a currency determined?

O Under a floating exchange rate system, the value of a currency is determined by institutional forces.
O Under a floating exchange rate system, the value of a currency is determined by a reference currency, usually the euro.
O Under a floating exchange rate system, the value of a currency as it follows a floating pegged system.
O Under a floating exchange rate system, the value of a currency is determined by a basket of currencies.
O Under a floating exchange rate system, the value of a currency is determined by the market forces of supply and demand.

Answer 1

The value of a currency under a floating exchange rate system is determined by the market forces of supply and demand. An increase in supply or decrease in demand for a currency leads to depreciation, while an increase in demand or decrease in supply leads to appreciation.

Step-by-step explanation:

Under a floating exchange rate system, the value of a currency is determined by the market forces of supply and demand. When investors exchange their investments from one currency to another, such as from the Turkish lira to U.S. dollars, the supply of the lira increases while its demand decreases, leading to a depreciation in its value. Conversely, the increased demand for the U.S. dollars causes its value to appreciate.

In this system, there is no reference currency like the euro, no fixed pegging to other currencies, and it's not determined by a basket of currencies. Floating exchange rates are influenced by economic indicators, investor perceptions, geopolitical stability, and a country's economic policy among other factors. This can lead to fluctuations in currency value in a short period, as was the case with the Turkish lira in 2018.