Which term best describes a situation where currencies are allowed to float freely according to market demands?

The term that best describes a situation where currencies are allowed to float freely according to market demands is "free floating." In a free-floating exchange rate system, the value of a currency is determined by the forces of supply and demand in the foreign exchange market without direct governmental or central bank intervention. This means that economic factors, such as inflation rates, interest rates, and overall economic performance, will influence exchange rates, allowing them to fluctuate freely based on market conditions.

In contrast, the other options suggest varying degrees of government intervention. Managed floating refers to a system where a country's currency value is allowed to fluctuate in response to the foreign exchange market, but the central bank may intervene to stabilize or influence the currency value. A conventional peg involves a currency being fixed to another major currency, thereby limiting its ability to float freely. Currency stabilization typically refers to actions taken to maintain or improve the stability of a currency's value, often through government interventions.

Thus, the correct answer emphasizes the absence of intervention and the true responsiveness of the currency to market forces.