A floating exchange rate means that the exchange rate is fixed by the __________

Step 1: Analyze the question The question asks who or what determines the exchange rate under a floating exchange rate system.

Step 2: Explain the concept An exchange rate is the price of one country's currency in terms of another (e.g., how many naira equal one US dollar). There are two main systems:

• Fixed (pegged) exchange rate: The government or central bank sets the rate and intervenes to keep it there.
• Floating (flexible) exchange rate: The rate is determined freely in the foreign exchange market by the demand for and supply of currencies, with little or no government intervention.

Step 3: Work through the options

• A. Central bank of the country: This describes a fixed system, where the central bank sets or defends the rate. ❌
• B. Forces of demand and supply: This is the definition of a floating rate. ✅
• C. IMF: The IMF supervises the international monetary system but does not set exchange rates. ❌
• D. Ministry of Finance: This is a government body that, like the central bank, would be associated with fixing rates. ❌

Step 4: Show how it works If Nigerians want more US dollars (for imports, school fees abroad, etc.), demand for dollars rises. The dollar becomes more expensive in naira, so the naira depreciates. If more dollars flow in (from oil exports or remittances), the supply of dollars rises, and the naira appreciates.

**Answer: B. Forces of demand and supply.

Exam tip: Remember "Float = Free market." A boat floats freely on water, and a floating currency moves freely with market forces. "Fixed = Fixed by the government/central bank."