In a free floating currency arrangement, which of the following is true?

In a free-floating currency arrangement, exchange rates are indeed determined by demand and supply conditions within the foreign exchange market. This means that factors such as trade balances, interest rates, inflation rates, political stability, and economic performance all influence the value of a currency relative to others. In such a system, currencies can appreciate or depreciate freely based on market forces, without direct government intervention in the exchange rate mechanism.

The presence of market-driven dynamics means that when there is increased demand for a currency (for example, due to increased exports or foreign investment), its value will rise. Conversely, if there is an oversupply of a currency or decreased demand, its value will fall. This fluidity reflects the realities of global trade and finance, where currencies are exchanged based on prevailing economic sentiments and conditions.

In contrast, other options suggest influences that are not characteristic of a free-floating system. Government policy or central bank interventions typically apply to fixed or pegged currency systems, where the value of a currency is maintained at a certain level against another currency or a basket of currencies. Interest rates can indeed impact exchange rates, but in a free-floating system, they are part of the broader economic factors that determine the currency's value rather than being irrelevant. Therefore, the