Multiple Choice QuestionWhat is the exchange-rate system in which the government sets the exchange rates?Multiple choice question.FlexibleFloatingFormalFixed

1. Breakdown the Problem

We need to determine the type of exchange-rate system where the government actively sets and maintains the exchange rates.

2. Relevant Concepts

The exchange-rate systems can generally be categorized into:

• Flexible (or floating) exchange rate: Determined by market forces without direct government control.
• Fixed (or formal) exchange rate: Set and maintained by the government.

3. Analysis and Detail

1. Flexible/Floating Exchange Rate: The market dictates the currency value based on supply and demand.
2. Formal/Fixed Exchange Rate: The government or central bank establishes the currency value against another currency or basket of currencies and intervenes to maintain that rate.

4. Verify and Summarize

In this case, we are looking for the system where the government sets the rate, which corresponds to the formal or fixed exchange-rate system.

Final Answer

Fixed (or formal) exchange-rate system is where the government sets the exchange rates.