DECA+ Business Management and Administration Practice Exam

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Boost your business management skills with the DECA+ Business Management and Administration Exam. Practice with interactive questions, hints, and detailed explanations. Ace your exam today!

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What is a floating exchange-rate system?

A fixed value for currency
A system where a nation's currency's value fluctuates
A trade balance surplus
A form of economic sanctions

The correct answer is: A system where a nation's currency's value fluctuates

In a floating exchange-rate system, the value of a nation's currency is determined by market forces without direct government or central bank intervention. This means that the currency's value fluctuates based on supply and demand dynamics, influenced by factors such as interest rates, inflation, political stability, and economic performance. When a currency is allowed to float, it can appreciate or depreciate freely in the international market. For example, if a country's economic outlook is strong, demand for its currency may increase, leading to an appreciation in its value. Conversely, if there are economic uncertainties or negative news, demand may drop, causing the currency to decrease in value. This system allows for a more flexible and responsive approach to economic conditions compared to fixed exchange-rate systems, where the value of currency is pegged to another major currency or a basket of currencies. Here, currency values remain static unless adjusted by government policies, limiting their ability to respond to market changes.