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An exchange-rate system in which the nominal exchange rate is set by the government is known as

a. a flexible exchange-rate system
b. a floating exchange-rate system
c. a fixed exchange-rate system
d. an exchange-rate union

1 Answer

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Final answer:

A government-set nominal exchange rate characterizes a fixed exchange-rate system, which keeps currency values stable by pegging them to a major currency or basket of currencies. In contrast, a floating exchange-rate system allows market forces to determine exchange rates, leading to more fluctuations.

Step-by-step explanation:

An exchange-rate system in which the nominal exchange rate is set by the government is known as a fixed exchange-rate system. In this regime, a country's currency value is tied or pegged to another major currency, like the US dollar or the euro, or to a basket of currencies.

Governments intervene to manage the exchange rate's value, maintaining it within a specific target range. This system ensures that the value of the currency remains relatively stable against whatever it is pegged to, which can help stabilize trade flows and provide a predictable environment for international business. However, it does limit the flexibility of the country's monetary policy to respond to domestic economic conditions.

On the other hand, a floating exchange-rate system allows the foreign exchange market to determine exchange rates, and governments usually do not intervene. The U.S. dollar is an example of a floating exchange rate, which can be subject to fluctuations based on market conditions.

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