Question
Supposing there is a free floating exchange rate system, what are three exchange rate policy options?
Question 13 options:
Practice managed floating, do nothing , employ fewer tariffs.
Do nothing, intervene in the foreign exchange market, use interest rates
Practice managed floating, increase foreign investment, employ higher tariffs.
Do nothing, intervene in the foreign exchange market, adjust the consumer price index
Question 13 options:
Practice managed floating, do nothing , employ fewer tariffs.
Do nothing, intervene in the foreign exchange market, use interest rates
Practice managed floating, increase foreign investment, employ higher tariffs.
Do nothing, intervene in the foreign exchange market, adjust the consumer price index
Answers
GPT-4o mini
In a free-floating exchange rate system, currencies fluctuate based on market forces without direct government or central bank intervention. However, policymakers can still influence exchange rates through various mechanisms. Here are three exchange rate policy options based on your question:
1. **Do nothing, intervene in the foreign exchange market, use interest rates**:
- "Do nothing" implies allowing the currency to float freely without intervention.
- "Intervene in the foreign exchange market" can involve buying or selling currency to influence its value.
- "Use interest rates" refers to altering interest rates to affect capital flows and, in turn, the exchange rate.
Based on the typical approach to exchange rate policies in a free-floating system, this option encompasses practical methods of influencing exchange rates while still allowing for market determination.
The other options you've listed don't align as well with commonly accepted practices. For example, "employ higher tariffs" can affect trade and potentially influence the exchange rate but is not directly a currency exchange rate policy. Similarly, things like "adjust the consumer price index" don't directly influence exchange rates.
Thus, the best answer among those provided is **"Do nothing, intervene in the foreign exchange market, use interest rates."**
1. **Do nothing, intervene in the foreign exchange market, use interest rates**:
- "Do nothing" implies allowing the currency to float freely without intervention.
- "Intervene in the foreign exchange market" can involve buying or selling currency to influence its value.
- "Use interest rates" refers to altering interest rates to affect capital flows and, in turn, the exchange rate.
Based on the typical approach to exchange rate policies in a free-floating system, this option encompasses practical methods of influencing exchange rates while still allowing for market determination.
The other options you've listed don't align as well with commonly accepted practices. For example, "employ higher tariffs" can affect trade and potentially influence the exchange rate but is not directly a currency exchange rate policy. Similarly, things like "adjust the consumer price index" don't directly influence exchange rates.
Thus, the best answer among those provided is **"Do nothing, intervene in the foreign exchange market, use interest rates."**