Final answer:
The IMF uses three approaches option (c) to assess the long-term equilibrium real exchange rate: floating (flexible) exchange rate, fixed (pegged) exchange rate, and merged currency. Governments choose between these regimes based on how they wish to manage economic stability and growth.
Step-by-step explanation:
The International Monetary Fund (IMF) assesses the long-term equilibrium real exchange rate using three approaches: a floating (flexible) exchange rate, a fixed (pegged) exchange rate, and a multilateral exchange rate or merged currency. Governments can select from these exchange rate regimes based on their economic objectives and conditions.
A floating exchange rate is determined by the foreign exchange market without direct government intervention. A fixed exchange rate is set and maintained by a government against another major currency or basket of currencies. A merged currency involves adopting a common currency with one or more nations, eliminating foreign exchange risk within that area.
In the mid-2000s, about one-third of the countries used a soft peg approach, also known as a managed float, where the government allows some fluctuations but manages the rate within a certain range. About one-quarter of the countries used a hard peg approach, which tightly controls the exchange rate against a single major currency or a basket of currencies.
The trend indicated a shift from the soft peg approach to more solidified options, such as either the floating rates or a hard peg, because the uncertainty and potential instability associated with the soft peg could cause severe issues when exchange rates inevitably moved.