Floating Exchange Rate System: Quizzes and Practice Questions

Question 1

In a floating exchange rate system, which factor **does not** influence the exchange rate?

Accepted Answer

Government intervention

Answer

Interest rates

Answer

Inflation

Answer

Relative economic growth

Question 2

Which of the following is a defining characteristic of a floating exchange rate system?

Accepted Answer

Exchange rates are determined by market forces of supply and demand

Answer

Government intervention to set exchange rates

Answer

Fixed exchange rates

Question 3

In a floating exchange rate system, what is the primary determinant of the value of a currency?

Accepted Answer

Supply and demand in the foreign exchange market

Answer

Central bank decisions

Answer

Economic growth

Answer

Government policies

Question 4

How does a depreciation of the domestic currency impact exports?

Accepted Answer

Makes exports cheaper and more competitive in foreign markets

Answer

Increases the cost of imports

Answer

Has no effect on exports

Answer

Reduces demand for domestic exports

Question 5

What is a potential advantage of a floating exchange rate system?

Accepted Answer

Automatic adjustment to correct economic imbalances

Answer

Protection from currency crises

Answer

Elimination of exchange rate volatility

Question 6

How does a floating exchange rate system differ from a fixed exchange rate system?

Accepted Answer

Exchange rates are market-determined, not pegged to a specific level

Answer

Greater exchange rate stability

Answer

Reduced government intervention in the foreign exchange market

Question 7

What is the primary role of the central bank in a floating exchange rate system?

Accepted Answer

To intervene in the foreign exchange market to mitigate excessive fluctuations

Answer

To eliminate exchange rate volatility completely

Answer

To set and maintain a fixed exchange rate

Question 8

Which of the following is a potential disadvantage of a floating exchange rate system?

Accepted Answer

Exchange rate volatility, leading to uncertainty for businesses and investors

Answer

Increased government debt

Answer

Depreciation of the domestic currency

Answer

Reduced international trade

Question 9

How does a floating exchange rate system impact foreign investment?

Accepted Answer

Increased risk due to potential exchange rate fluctuations

Answer

Elimination of investment risk

Answer

Guaranteed high returns on foreign investments

Question 10

Which of the following is not a characteristic of a floating exchange rate system?

Accepted Answer

Government intervention regulates exchange rates

Answer

Exchange rates are influenced by supply and demand

Answer

Exchange rates can fluctuate significantly

Question 11

What is the primary mechanism through which exchange rates are determined in a floating exchange rate system?

Accepted Answer

Supply and demand in the foreign exchange market

Answer

Economic growth rates of individual countries

Answer

Intervention by central banks only

Answer

Government regulations and policies solely

Question 12

Which of the following is not an advantage of a floating exchange rate system?

Accepted Answer

Completely eliminates exchange rate volatility

Answer

Facilitates automatic adjustments to balance of payments imbalances

Answer

Enhances flexibility in economic policymaking

Answer

Promotes international trade and investment

Question 13

What is the primary disadvantage of a floating exchange rate system?

Accepted Answer

Increased fluctuations in exchange rates

Answer

Persistent inflation

Answer

Reduced international trade

Answer

Loss of government control over exchange rates

Question 14

How does a floating exchange rate system affect the balance of payments?

Accepted Answer

It adjusts automatically to restore equilibrium in the balance of payments

Answer

It has no impact on the balance of payments

Answer

It necessitates government intervention to address imbalances

Question 15

How does a floating exchange rate system affect the competitiveness of a country's exports?

Accepted Answer

It can enhance or diminish export competitiveness based on exchange rate movements

Answer

It ensures a constant level of export competitiveness

Answer

It consistently improves export competitiveness

Question 16

What is a potential drawback of floating exchange rates for businesses?

Accepted Answer

Increased exchange rate volatility, leading to revenue and cost uncertainties

Answer

Elimination of exchange rate risk

Answer

Guaranteed stability in exchange rates

Question 17

How can governments mitigate the potential risks of floating exchange rates?

Accepted Answer

Implementing sound monetary and fiscal policies, and supporting businesses with risk management strategies

Answer

Fixing the exchange rate to a stable currency

Question 18

Which of the following is a characteristic of a floating exchange rate system?

Accepted Answer

Exchange rates are determined by supply and demand in the foreign exchange market

Answer

Currencies are backed by gold reserves

Answer

Exchange rates are fixed by governments

Answer

There is no government intervention in the foreign exchange market

Question 19

How do exchange rates adjust in a floating exchange rate system?

Accepted Answer

Through changes in supply and demand in the foreign exchange market

Answer

Through random fluctuations

Answer

Through direct intervention by central banks

Answer

Through fixed exchange rate adjustments

Question 20

Which of the following is an advantage of a floating exchange rate system?

Accepted Answer

Flexibility in response to economic shocks

Answer

Reduced international trade

Answer

Elimination of exchange rate risk

Answer

Stability in currency values

Question 21

What is the primary role of central banks in a floating exchange rate system?

Accepted Answer

To manage monetary policy within their respective economies

Answer

To set and maintain fixed exchange rates

Answer

To directly intervene in the foreign exchange market

Question 22

What term describes a significant decrease in the value of a currency in a floating exchange rate system?

Accepted Answer

Depreciation

Answer

Appreciation

Answer

Inflation

Answer

Devaluation

Question 23

What is the purpose of a currency peg within a floating exchange rate system?

Accepted Answer

To prevent excessive fluctuations in the exchange rate

Answer

To eliminate exchange rate risk

Answer

To permanently fix the exchange rate

Question 24

Which of the following is a potential challenge in managing a floating exchange rate system?

Accepted Answer

Excessive volatility in exchange rates

Answer

Complete stability in currency values

Answer

Absence of exchange rate risk

Answer

Lack of government intervention

Question 25

How might a depreciation in the exchange rate impact a country's trade deficit?

Accepted Answer

By making exports more competitive and imports more expensive, leading to a potential reduction in the trade deficit

Answer

By having no impact on the trade deficit

Answer

By making imports more competitive and exports more expensive, leading to a potential increase in the trade deficit

Question 26

Define the key characteristic of a floating exchange rate system.

Accepted Answer

Currency values are determined by the interplay of supply and demand in the foreign exchange market

Answer

Currency values are set rigidly by government authorities

Answer

The exchange rate is fixed relative to a particular currency

Question 27

Identify the primary benefit of a floating exchange rate system.

Accepted Answer

It allows the exchange rate to self-adjust in response to changing economic conditions

Answer

It stimulates economic expansion

Answer

It guarantees stability in the foreign exchange market

Question 28

What is the primary objective of central bank intervention in the foreign exchange market?

Accepted Answer

To influence the exchange rate

Answer

To regulate the banking system

Answer

To manage the government's debt

Answer

To control inflation

Question 29

Which of the following is NOT a factor that directly influences the exchange rate under a floating exchange rate system?

Accepted Answer

Government intervention

Answer

Interest rate differentials

Answer

Inflation differentials

Answer

Supply and demand for foreign exchange

Question 30

In a floating exchange rate system, the central bank may intervene in the foreign exchange market to:

Accepted Answer

Smooth out short-term fluctuations

Answer

Control the money supply

Answer

Fix the value of the domestic currency

Question 31

Which of the following is a potential advantage of a floating exchange rate system?

Accepted Answer

Automatic adjustment to changes in supply and demand for currencies

Answer

Stability of the exchange rate

Answer

Control over inflation

Question 32

What is the main difference between a fixed and a floating exchange rate system?

Accepted Answer

In a fixed system, the central bank sets and maintains the exchange rate, while in a floating system, the exchange rate is determined by market forces of supply and demand.

Answer

Fixed systems are more stable than floating systems.

Question 33

In a floating exchange rate system, an appreciation of the domestic currency typically leads to:

Accepted Answer

Reduced exports and increased imports

Answer

Increased exports and reduced imports

Answer

Lower inflation

Answer

Reduced foreign investment

Question 34

Which of the following is a method of foreign exchange intervention?

Accepted Answer

Open market operations

Answer

Monetary policy

Answer

Trade policy

Answer

Fiscal policy

Question 35

What is the purpose of a crawling peg exchange rate system?

Accepted Answer

To gradually adjust the exchange rate in response to market conditions, while limiting volatility.

Answer

To fix the exchange rate at a specific level

Answer

To float the exchange rate freely

Question 36

Which of the following is a key feature of a managed float exchange rate system?

Accepted Answer

The central bank intervenes occasionally to influence the exchange rate.

Answer

The exchange rate is completely determined by market forces.

Answer

The exchange rate is fixed at a specific level.

Question 37

What is the role of speculators in a floating exchange rate system?

Accepted Answer

To profit from anticipated changes in the exchange rate.

Answer

To control inflation

Answer

To stabilize the exchange rate

Question 38

Which of the following is NOT a key determinant of a country's floating exchange rate?

Accepted Answer

Government intervention in the foreign exchange market

Answer

Interest rate differentials

Answer

Demand for exports

Question 39

When a country's currency appreciates against another currency in a floating system, what impact does this have on its exporters?

Accepted Answer

Their goods become more expensive for foreign buyers, potentially reducing demand.

Answer

Their goods become cheaper for foreign buyers, potentially increasing demand.

Answer

Their profits increase due to higher demand for their exports.

Question 40

In a floating exchange rate system, what is the primary mechanism through which imbalances in the balance of payments are adjusted?

Accepted Answer

Automatic changes in the exchange rate itself

Answer

Trade restrictions and tariffs

Answer

Government intervention in the foreign exchange market

Answer

Adjustments in domestic interest rates

Question 41

Which of the following is a potential advantage of a floating exchange rate system?

Accepted Answer

Increased flexibility in responding to external economic shocks

Answer

Reduced volatility in currency values

Answer

Enhanced government control over the exchange rate

Question 42

A country experiences a significant inflow of foreign investment. How would this likely affect its exchange rate in a floating system?

Accepted Answer

The currency would appreciate, making its exports more expensive for foreign buyers.

Answer

The exchange rate would remain unchanged.

Answer

The impact on the exchange rate would be unpredictable.

Answer

The currency would depreciate, making its exports cheaper for foreign buyers.

Question 43

Which of the following statements about a floating exchange rate system is true?

Accepted Answer

The value of a currency is primarily determined by market forces of supply and demand.

Answer

The central bank has direct control over the exchange rate.

Answer

The exchange rate is fixed against a specific foreign currency.

Question 44

Consider a country with a floating exchange rate. If its inflation rate is significantly higher than its trading partners, what is the likely effect on its currency?

Accepted Answer

Depreciation, making its exports cheaper for foreign buyers.

Answer

Appreciation, making its exports more expensive for foreign buyers.

Answer

Increased volatility in the exchange rate.

Answer

No change in the exchange rate.

Question 45

What is the primary role of central banks in a floating exchange rate system?

Accepted Answer

To act as a lender of last resort and manage liquidity in the financial system

Answer

To impose strict regulations on foreign exchange transactions

Answer

To directly control the exchange rate through intervention

Question 46

In a floating exchange rate system, what is the primary mechanism for adjusting trade imbalances between countries?

Accepted Answer

Changes in the exchange rate

Answer

International trade agreements

Answer

Government subsidies for exports

Answer

Tariffs and quotas on imports

Question 47

Which of the following is NOT a characteristic of a floating exchange rate system?

Accepted Answer

Fixed exchange rate between currencies

Answer

Self-correcting mechanism for trade imbalances

Answer

Fluctuations in currency values based on market forces

Answer

Flexibility in responding to economic shocks

Question 48

Which of the following is NOT a defining characteristic of a floating exchange rate system?

Accepted Answer

Government intervention to maintain a specific exchange rate.

Answer

Currency values are determined by supply and demand in the foreign exchange market.

Answer

Exchange rates fluctuate based on market forces.

Question 49

If a country experiences a rise in demand for its exports, what is the likely effect on its exchange rate in a floating system?

Accepted Answer

The exchange rate will appreciate (strengthen).

Answer

The exchange rate will depreciate (weaken).

Answer

The exchange rate will remain unchanged.

Answer

The effect on the exchange rate is unpredictable.

Question 50

Which of the following is a potential benefit of a floating exchange rate system for a country?

Accepted Answer

Automatic adjustment of the balance of payments.

Answer

Increased control over monetary policy.

Answer

Increased price stability.

Answer

Reduced volatility in exchange rates.

Question 51

If a country's currency is depreciating against other currencies, what is a likely consequence for its businesses?

Accepted Answer

Exports become more competitive, while imports become more expensive.

Answer

Both exports and imports become more expensive.

Answer

Exports become less competitive, while imports become cheaper.

Question 52

Which of the following factors can influence the demand for a country's currency in the foreign exchange market?

Accepted Answer

Interest rate differentials between the country and its trading partners.

Answer

The size of the country's budget deficit.

Answer

The level of government spending on infrastructure.

Question 53

In a floating exchange rate system, what is the main role of central banks?

Accepted Answer

To manage inflation and maintain financial stability.

Answer

To directly set exchange rates.

Answer

To intervene in the foreign exchange market to maintain a fixed exchange rate.

Question 54

If a country's currency is experiencing significant volatility due to speculation in the foreign exchange market, what measure can the central bank take to address this?

Accepted Answer

Intervene in the market by buying or selling its own currency.

Answer

Raise interest rates to attract foreign investment.

Answer

Impose capital controls to restrict foreign investment.

Question 55

Which of the following is a potential disadvantage of a floating exchange rate system?

Accepted Answer

Increased uncertainty for businesses engaged in international trade.

Answer

Reduced need for foreign exchange reserves.

Answer

Greater flexibility for the government to manage its economy.

Question 56

The 'Big Mac Index' is an example of a measure that can be used to:

Accepted Answer

Estimate the purchasing power parity (PPP) between currencies.

Answer

Predict future exchange rate movements.

Answer

Assess the overall economic strength of a country.

Question 57

In a floating exchange rate system, how does a government's decision to increase interest rates likely affect the exchange rate?

Accepted Answer

The exchange rate is likely to appreciate (strengthen) as investors are attracted by higher returns.

Answer

The exchange rate is likely to depreciate (weaken) as investors seek lower returns elsewhere.

Answer

There is no significant impact on the exchange rate.