Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
They are fixed to a specific value
B
They fluctuate based on market demand and supply
C
They are regulated by central banks
D
They remain constant over time
Understanding the Answer
Let's break down why this is correct
Answer
A primary characteristic of flexible exchange rates is that they can change frequently based on market forces, especially due to speculation. This means that when traders believe a currency will strengthen or weaken in the future, they buy or sell that currency, causing its value to rise or fall. For example, if many traders think that the Euro will increase in value against the US Dollar, they will buy Euros now, leading to an increase in its price. This constant buying and selling based on predictions creates a dynamic and often volatile currency market. Overall, speculation plays a crucial role in determining how flexible exchange rates move.
Detailed Explanation
Flexible exchange rates change all the time. Other options are incorrect because Some might think flexible rates are fixed; It's a common mistake to think central banks control all rates.
Key Concepts
speculation in currency markets
Topic
Flexible Exchange Rates
Difficulty
easy level question
Cognitive Level
understand
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