True or false: In a floating exchange rate system, currency values are based on supply and demand in the foreign exchange markets.True false question.TrueFalse

True.

In a floating exchange rate system, currency values fluctuate based on the forces of supply and demand in the foreign exchange markets. Unlike a fixed exchange rate system, where currencies are pegged to one another or a commodity like gold, floating exchange rates allow for greater flexibility.

When demand for a currency increases, perhaps due to strong economic performance or higher interest rates, its value rises. Conversely, if a currency becomes less desirable, its value falls. This system is influenced by numerous factors including economic indicators, political stability, and market speculation, reflecting real-time economic conditions. This inherent fluctuation provides a dynamic method of determining exchange rates, allowing for adjustments that can help to stabilize economies in response to changing global economic scenarios.