IGNOU IBO 6 2025 - "A system of floating exchange rate fails when governme

Question

"A system of floating exchange rate fails when governments ignore the verdict of the exchange markets on their policies and resort to direct controls over trade and capital flows."

12 Sep 2025

Answer :

Word Count : 266

A floating exchange rate system is designed to reflect the demand and supply conditions of currencies in the international market. It provides flexibility by allowing exchange rates to adjust automatically in response to trade flows, capital movements, and macroeconomic policies. However, the effectiveness of such a system depends on the credibility and discipline of government policies. When governments disregard market signals and intervene excessively,

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