What does a floating exchange rate regime mean?

• A. The currencies pegged to gold
• B. Central banks set official rates
• C. Currencies fluctuate against each other freely
• D. Currencies do not trade

Answer: (C)

In a floating exchange rate regime, the value of a country's currency is determined by supply and demand in the foreign exchange market. The rate moves up or down based on market forces—investor demand, interest rates, inflation, and economic outlook—rather than being fixed by the government. While authorities may intervene occasionally, there is no official peg to another currency or commodity, and the rate isn’t kept at a specific target. This is why the description that currencies fluctuate against each other freely best fits the concept: the exchange rate is allowed to vary and respond to economic conditions. The other options describe fixed or artificial structures (pegging to gold, setting official rates, or no trading), which do not define a floating regime.