Question

Choose the correct statements regarding the exchange rate system: \[ (A)\ \text{In a floating exchange rate system, the exchange rate is determined by market forces of demand and supply.} \] \[ (B)\ \text{In a fixed exchange rate system, making the domestic currency cheaper is called devaluation.} \] \[ (C)\ \text{An increase in the exchange rate implies that the price of foreign currency has increased, which is called depreciation.} \] \[ (D)\ \text{Exchange rates between two currencies adjust to reflect differences in price levels in the two countries.} \]

• A. (A), (B) and (C) only
• B. (A), (B) and (D) only
• C. (B), (C) and (D) only
• D. (A), (B), (C) and (D)

Hint:

Depreciation happens in a floating exchange rate system, while devaluation happens in a fixed exchange rate system when the government officially reduces the value of domestic currency.

Answer 1

The Correct Option is D