International Monetary System and Exchange-Rate Regimes

Introduction

The international monetary system is the set of institutions, rules, conventions and market practices that govern cross-border payments, exchange rates, reserve assets and international liquidity. It determines how currencies are valued, how external imbalances are financed, and how governments respond to shocks. For finance professionals, understanding the system is essential because exchange-rate arrangements affect trade competitiveness, foreign-currency debt, portfolio returns, inflation, interest rates and sovereign risk.

An exchange-rate regime is the method through which a country determines the value of its currency relative to other currencies. Regimes range from hard pegs, such as currency boards, to freely floating rates. In practice, many countries use intermediate arrangements, combining market determination with official intervention.

Learning Objectives

After completing this chapter, the reader should be able to:

• trace the evolution of the international monetary system from the gold standard through Bretton Woods to the present;
• distinguish fixed, floating, managed-floating and currency-board regimes;
• explain how central banks intervene in foreign-exchange markets;
• evaluate the role of reserve currencies and international liquidity;
• diagnose the causes and transmission mechanisms of currency crises; and
• assess exchange-rate choices from a policy and corporate-finance perspective.

1. Exchange Rates and the International Monetary System

An exchange rate is the price of one currency expressed in another. If the quotation is domestic currency per unit of foreign currency, an increase in the rate represents a depreciation of the domestic currency. For example, if the rupee–dollar rate rises from ₹82/$ to ₹85/$, more rupees are required to purchase one dollar.

A useful identity for international transactions is the balance-of-payments accounting identity:

The accounts are measured over the same period and use consistent accounting conventions. The current account records trade in goods and services, primary income and transfers. The capital and financial account records capital transfers and transactions in financial assets. Official reserve transactions reflect changes in central-bank reserve assets. In economic interpretation, a current-account deficit must be financed by net capital inflows, reserve depletion, or both, although statistical discrepancies may arise.

The choice of regime influences the adjustment mechanism. Under a floating rate, a deficit may generate depreciation, which can improve export competitiveness. Under a fixed rate, adjustment occurs more through changes in reserves, domestic demand, prices, wages and interest rates.

2. Historical Evolution

2.1 The Classical Gold Standard

The classical gold standard operated broadly from the 1870s until the First World War, although participation and implementation varied. Each participating country defined its currency in terms of a fixed quantity of gold and promised convertibility. Exchange rates between currencies were therefore linked by their gold parities.

Suppose currency A was convertible into 1/20 ounce of gold and currency B into 1/40 ounce. One unit of A contained twice as much gold as one unit of B; consequently, the parity was approximately 2 units of B per unit of A, before allowing for transport, insurance and transaction costs.

The system supplied a nominal anchor and facilitated long-term trade and investment. Gold flows helped settle external imbalances. A country losing gold faced monetary contraction and often higher interest rates, reducing domestic demand and tending to improve its external position. A country receiving gold could experience monetary expansion.

The adjustment process was not automatic in a frictionless sense. It imposed deflationary pressure on deficit countries, could generate unemployment, and depended on confidence in convertibility. Governments also frequently sterilised gold flows or suspended convertibility during emergencies. The First World War disrupted the system, and attempts to restore it in the interwar period were undermined by changed relative prices, war debts, reparations, political conflict and the Great Depression.

2.2 The Interwar Breakdown

During the 1920s, several economies returned to gold at exchange rates that were inconsistent with domestic prices and productivity. Britain’s restoration of sterling convertibility at its pre-war parity contributed to deflationary pressure and loss of competitiveness. The gold standard’s constraints limited monetary responses to banking distress and falling output. Competitive devaluations and exchange controls increased during the 1930s, illustrating the difficulty of maintaining fixed parities without credible cooperation.

2.3 Bretton Woods

The Bretton Woods conference of 1944 created a managed fixed-rate system for the post-war period. The International Monetary Fund (IMF) was established to support exchange-rate stability and provide temporary balance-of-payments assistance. The World Bank supported reconstruction and development.

Currencies were pegged to the US dollar, while the dollar was convertible into gold for official foreign holders at $35 per troy ounce. Countries could adjust their parities in cases of fundamental disequilibrium, subject to institutional procedures. The system therefore differed from an immutable gold standard: it was an adjustable-peg arrangement.

The system initially benefited from a dominant US economy, expanding trade and restrictions on destabilising capital flows. Over time, however, the quantity of dollars held abroad grew relative to US gold reserves. This created a confidence problem: foreign official holders could question whether all outstanding dollars could be converted into gold. In August 1971, the United States suspended dollar convertibility; by 1973, the major currencies had moved toward floating rates. This episode is often associated with the Triffin dilemma: the issuer of the key reserve currency must supply international liquidity, but persistent provision of that liquidity can weaken confidence in the reserve asset.

2.4 The Contemporary System

The present system is plural rather than uniform. Major currencies such as the US dollar, euro, pound sterling and Japanese yen generally float, while many smaller economies peg to a major currency or basket. Some countries use managed floats, intervening when movements are judged disorderly or inconsistent with policy objectives. Regional monetary arrangements, notably the euro area, replace national currencies with a common currency and a shared central bank.

The contemporary system is also characterised by large private capital flows, electronic trading, global value chains, derivative markets and extensive use of foreign-currency borrowing. These developments have increased market depth but also made countries vulnerable to sudden stops, contagion and balance-sheet effects.

3. Main Exchange-Rate Regimes

3.1 Fixed or Conventional Peg

Under a fixed regime, the authorities announce a central parity and commit to maintaining the exchange rate within a narrow band. The central bank buys domestic currency when depreciation pressure arises and sells domestic currency when appreciation pressure arises, using foreign reserves and monetary-policy instruments.

A fixed rate can reduce exchange-rate uncertainty, anchor inflation expectations and support trade. Its costs include loss of monetary-policy autonomy, reserve requirements and vulnerability to speculative attack. A fixed rate is credible only when the government’s reserves, fiscal position, financial system and political commitment support the announced parity.

3.2 Floating Exchange Rate

Under a free float, supply and demand in foreign-exchange markets determine the rate. Market forces respond to interest-rate differentials, inflation expectations, growth prospects, risk sentiment, trade flows and political developments. The central bank retains greater monetary-policy autonomy, but the currency may be volatile.

A float does not imply complete absence of official activity. Authorities may intervene during disorderly markets, accumulate precautionary reserves or use macroprudential measures. The distinction is whether intervention is intended to maintain a particular parity or merely to moderate market dysfunction.

3.3 Managed Float

A managed float, or dirty float, combines market determination with discretionary intervention. Authorities may smooth excessive volatility, resist temporary overshooting, accumulate reserves, or influence competitiveness. The regime can provide flexibility while limiting extreme movements, but its opacity may reduce predictability. If market participants cannot identify the intervention rule, risk premia may rise.

3.4 Crawling Peg

A crawling peg adjusts the official parity gradually according to a rule or judgement. The crawl may reflect inflation differentials, productivity trends, or a desired real exchange rate. It can avoid a large one-time devaluation, but a predictable crawl may encourage speculative positioning if the market expects a discrete adjustment.

3.5 Currency Board

A currency board is a strict form of fixed exchange rate. The monetary authority commits to exchange domestic currency at a specified rate and normally backs the monetary base with foreign-reserve assets. A simplified balance-sheet relationship is:

The inequality is a prudential formulation rather than a universal legal rule; some boards require full or more than full backing, while others define eligible assets differently. The monetary base consists broadly of currency in circulation and commercial-bank reserves. A currency board sharply limits discretionary money creation and can strengthen credibility. Its costs include limited lender-of-last-resort capacity, reduced monetary autonomy and potentially severe adjustment through output, wages and employment.

3.6 Monetary Union

In a monetary union, participating countries share a currency and a common monetary authority. Exchange-rate risk among members disappears, but member countries surrender independent monetary policy and cannot devalue against one another. The suitability of a monetary union depends partly on labour mobility, fiscal transfers, financial integration, synchronised business cycles and mechanisms for dealing with asymmetric shocks.

4. The Policy Trilemma

The impossible trinity, or trilemma, states that a country cannot simultaneously maintain all three of the following:

1. a fixed exchange rate;
2. free international capital mobility; and
3. an independent monetary policy.

At most, it can sustainably choose two. If a country fixes its exchange rate and permits capital to move freely, domestic interest rates must generally follow the anchor currency’s monetary conditions. If it wants independent monetary policy and free capital mobility, it must accept exchange-rate flexibility. If it wants a fixed rate and monetary autonomy, it must restrict capital movements.

The trilemma is not an exact mechanical law in every short period. Capital controls can be incomplete, exchange rates can move within bands, and financial markets can be segmented. Nevertheless, it is a powerful framework for analysing policy trade-offs.

5. Central-Bank Intervention

5.1 Spot-Market Intervention

To support its currency, a central bank sells foreign reserves and buys domestic currency. To resist appreciation, it buys foreign currency and supplies domestic currency. Intervention affects the central bank’s balance sheet and may change domestic liquidity.

If intervention changes domestic liquidity, it is unsterilised. If the central bank offsets the liquidity effect through domestic bond transactions, it is sterilised. For example, purchasing foreign currency normally creates domestic monetary liabilities; selling domestic securities can withdraw the resulting liquidity.

A simplified reserve relation is:

Here, ΔR is the change in foreign-exchange reserves measured in a chosen currency unit. The expression abstracts from valuation changes, interest income, and other reserve transactions.

5.2 Effectiveness and Limitations

Intervention is most credible when reserves are adequate, the policy objective is clear, markets are not overwhelmingly positioned against the currency, and fiscal and monetary policies are consistent with the target. Sterilised intervention may influence expectations and risk premia even when its direct monetary effect is offset, but its impact is debated and often temporary.

Intervention cannot permanently defend an exchange rate inconsistent with economic fundamentals and available financing. Persistent defence may exhaust reserves, raise interest rates, damage bank balance sheets and invite speculation. Forward contracts, swaps and derivatives may supplement spot intervention, but they do not eliminate the underlying exposure; they can also obscure fiscal risks.

5.3 Reserve Adequacy and Opportunity Cost

Reserves provide insurance against external shocks, sudden capital outflows and import-financing needs. Holding reserves, however, has an opportunity cost because safe foreign assets may yield less than domestic investment or carry risks such as duration and exchange-rate exposure. Reserve management therefore balances liquidity, safety, return and diversification.

6. Reserve Currencies and International Liquidity

A reserve currency is widely held by central banks and other institutions as a store of value, medium for intervention and means of international settlement. The US dollar remains central because of the size and liquidity of US financial markets, the depth of Treasury markets, network effects, legal infrastructure and the dollar’s use in trade invoicing and global finance. The euro is also important, while the pound sterling, Japanese yen and, increasingly, the renminbi have international roles of varying scale.

Reserve-currency status gives the issuing country advantages, including cheaper external financing and reduced currency risk on liabilities denominated in its own currency. It may also create responsibilities: excessive use of financial sanctions, unstable fiscal policy or loss of confidence can encourage diversification. For other countries, concentration in one reserve asset creates exposure to the issuer’s monetary policy, financial conditions and geopolitical decisions.

International liquidity comprises official reserves, access to emergency financing, internationally accepted private instruments and the capacity of markets to provide foreign currency. The IMF’s lending facilities and Special Drawing Rights support the system, but neither replaces the need for sound domestic policy nor guarantees financing on demand.

7. Currency Crises

A currency crisis occurs when confidence in a currency or exchange-rate regime collapses, producing intense depreciation pressure, reserve loss, sharp interest-rate increases, capital flight or a forced regime change.

7.1 Models of Crisis

First-generation models emphasise inconsistent fiscal and monetary policies. If a government finances persistent deficits by creating money while defending a fixed rate, reserves eventually decline. Investors anticipate the loss of reserves and attack before reserves reach zero.

Second-generation models emphasise self-fulfilling expectations. A government may be able to defend a peg, but the cost—high interest rates, unemployment or banking stress—may become politically unacceptable. If investors expect abandonment, they demand higher interest rates, making defence more costly and validating the expectation.

Third-generation models focus on financial-sector and balance-sheet vulnerabilities. Banks or firms may borrow in foreign currency while earning revenue in domestic currency. A depreciation increases the domestic-currency value of their liabilities, weakens net worth and may cause defaults. Public guarantees can transform private losses into sovereign stress.

7.2 Typical Crisis Sequence

A common sequence is rapid credit expansion, asset-price appreciation, external borrowing and a growing current-account deficit. A shock then changes risk perceptions. Capital inflows slow or reverse, the currency comes under pressure, and authorities raise interest rates or sell reserves. If defence fails, depreciation increases the burden of foreign-currency debt, damages financial institutions and reduces output. Emergency financing, restructuring, capital controls or a new exchange-rate regime may follow.

The Mexican crisis of 1994–95, the Asian crisis of 1997–98 and Argentina’s crisis around 2001 illustrate different combinations of fixed-rate commitments, short-term capital flows, banking weaknesses, fiscal pressures and political constraints. Historical cases should not be treated as identical: institutional structures and external financing conditions matter.

8. Worked Application: Currency-Board Pressure

Consider an illustrative economy with a currency board pegged at 10 domestic units per dollar. The monetary base is 1,200 billion domestic units, while eligible foreign reserves are $130 billion. At the official parity, reserves are worth:

The apparent reserve coverage ratio is:

This indicates more than 100% coverage of the monetary base under the stated assumptions. It does not prove that the peg is safe. The analysis excludes contingent liabilities, bank runs, valuation losses, political constraints and the possibility that some reserves are illiquid or encumbered. If residents seek to convert 200 billion domestic units, the corresponding demand is $20 billion at the peg. Reserves would fall to $110 billion and reserve value to 1,100 billion domestic units, below the unchanged monetary base. The board would then need monetary contraction, emergency financing, restrictions, or a change in the regime. The example demonstrates that reserve adequacy is dynamic and depends on potential conversion demands, not merely on the current coverage ratio.

9. Case Study: The Asian Financial Crisis of 1997–98

Background

Several East Asian economies experienced strong growth, large capital inflows and exchange-rate arrangements that limited currency movement against the US dollar. Banks and corporations often borrowed short-term in foreign currency while investing in domestic assets with longer maturities.

Problem

As confidence weakened, investors withdrew funds. The combination of maturity mismatch, foreign-currency exposure and thin domestic financial markets made refinancing difficult. Defending exchange rates consumed reserves and required high interest rates, while depreciation increased the domestic value of foreign debt.

Analysis

The crisis cannot be explained solely by fiscal deficits; in several affected economies, public budgets had appeared relatively strong before the crisis. Financial-sector governance, weak supervision, connected lending, opaque corporate liabilities and heavy reliance on short-term external finance were central. The peg reduced perceived currency risk and may have encouraged unhedged borrowing. Once the peg became doubtful, the private sector’s balance-sheet losses amplified the initial shock.

Policy Response and Outcome

Countries allowed substantial depreciation, raised interest rates at various stages, restructured banks and corporations, and received international assistance. The adjustment was socially costly, but reforms subsequently included stronger reserve positions, improved supervision, longer-term financing and more flexible exchange rates in several economies.

Learning Points

The case demonstrates that a seemingly stable exchange rate can encourage hidden risk. Regime evaluation must therefore include private-sector currency mismatches, contingent public liabilities, reserve adequacy, capital-flow composition and financial supervision. Hedging and prudent maturity management are not optional merely because the exchange rate appears stable.

10. Professional and Managerial Implications

Treasurers should identify the regime governing each currency in which the firm earns revenue, incurs costs or holds debt. A peg reduces ordinary volatility but does not remove devaluation risk. Under a float, firms should distinguish transaction exposure, translation exposure and economic exposure.

A practical risk process includes:

• mapping currency cash flows by amount, timing and counterparty;
• measuring net exposure rather than assuming that revenues and costs naturally offset;
• testing depreciation, appreciation, interest-rate and liquidity scenarios;
• selecting forwards, options or swaps according to risk tolerance and cash-flow certainty;
• monitoring basis risk, counterparty risk and collateral requirements; and
• reviewing sovereign, convertibility and transfer risks in addition to market prices.

Banks and investors should assess reserve adequacy, external debt maturity, current-account dynamics, inflation credibility, fiscal capacity and political commitment. A high nominal reserve level may be misleading if reserves are borrowed, pledged, concentrated or small relative to short-term external liabilities.

11. Governance, Regulation and Contemporary Developments

Exchange-rate policy has distributional effects. Devaluation may support exporters but raise the price of imported food, fuel and medicines. High interest rates used to defend a currency may protect creditors while harming borrowers and employment. Policymakers should communicate objectives clearly and publish intervention, reserve and contingent-liability information where possible.

Capital-flow management can reduce vulnerability, but controls may be evaded, distort allocation and shift risk into less regulated channels. Macroprudential tools—such as limits on foreign-currency lending, liquidity requirements and countercyclical buffers—can complement exchange-rate policy.

Technology has made foreign-exchange markets faster and more interconnected. Algorithmic trading can improve liquidity in normal conditions but may intensify rapid repricing. Artificial-intelligence systems can assist stress testing and anomaly detection, yet they may reproduce correlated strategies, rely on unstable relationships or fail during regime changes. Governance should require model validation, human oversight, explainability appropriate to the use case, cybersecurity and controls over automated execution.

Recent developments include diversification of reserve portfolios, wider use of regional payment arrangements, digital payment systems and central-bank digital-currency research. These developments may reduce transaction costs, but they do not remove fundamental constraints involving liquidity, convertibility, fiscal credibility and external solvency.

Challenges and Limitations of Regime Classification

Official classifications may differ from de facto behaviour. A country may announce a float while intervening heavily, or announce a peg while allowing frequent discretionary adjustments. Exchange-rate regimes can also change during crises. Researchers therefore examine market volatility, reserve movements, interest-rate behaviour and capital controls rather than relying only on official labels.

No regime dominates in every context. Fixed rates can anchor expectations but transmit external shocks and constrain policy. Floating rates absorb shocks but may overshoot and expose balance sheets. Currency boards create credibility but require fiscal discipline and flexible domestic adjustment. Monetary unions eliminate internal currency risk but require institutions capable of addressing asymmetric shocks.

The appropriate regime depends on economic structure, inflation history, financial development, fiscal credibility, openness, trade composition, labour-market flexibility and the currency denomination of debt. Regime choice is consequently an institutional and political decision, not merely a technical selection.

Chapter Summary

The international monetary system has evolved from the classical gold standard to Bretton Woods and then to a diverse contemporary system of floating, managed and fixed arrangements. Gold convertibility supplied a nominal anchor but imposed severe adjustment costs. Bretton Woods combined fixed but adjustable parities with international institutions, yet collapsed when dollar-liquidity growth conflicted with confidence in gold convertibility.

Fixed regimes reduce exchange-rate uncertainty but require reserves and policy credibility. Floating regimes preserve monetary autonomy but permit volatility. Managed floats seek a compromise, while currency boards provide strong nominal discipline at the cost of monetary flexibility. The policy trilemma explains why fixed rates, free capital mobility and independent monetary policy cannot all be maintained indefinitely.

Central-bank intervention changes reserves and sometimes domestic liquidity, but cannot permanently sustain an inconsistent parity. Reserve currencies provide international liquidity and financing advantages while creating concentration and governance risks. Currency crises arise through fiscal inconsistency, self-fulfilling expectations, financial fragility and foreign-currency balance-sheet mismatches. Professional analysis therefore combines exchange-rate theory with reserve adequacy, financial supervision, corporate hedging and political economy.

Key Terms

International monetary system: Institutions, rules and practices governing international payments and exchange rates.

Exchange rate: The price of one currency in terms of another.

Gold standard: A system linking currency value and convertibility to a specified quantity of gold.

Bretton Woods system: Post-war adjustable-peg system centred on the US dollar and IMF.

Fixed exchange rate: A regime in which authorities maintain a specified parity or narrow band.

Floating exchange rate: A rate determined predominantly by market supply and demand.

Managed float: A market-based rate influenced by discretionary official intervention.

Crawling peg: A peg adjusted gradually according to a rule or policy judgement.

Currency board: A fixed-rate institution with strict rules linking monetary liabilities to foreign reserves.

Monetary union: An arrangement in which members share a currency and monetary authority.

Policy trilemma: The incompatibility of a fixed rate, free capital mobility and independent monetary policy.

Sterilised intervention: Foreign-exchange intervention offset by domestic transactions that neutralise its liquidity effect.

Reserve currency: A currency widely held for settlement, intervention and value storage.

International liquidity: Availability of assets and financing used to meet external payment needs.

Currency crisis: A severe loss of confidence causing depreciation pressure, reserve loss or regime collapse.

Sudden stop: An abrupt cessation or reversal of capital inflows.

Balance-sheet effect: Change in financial strength caused by currency or valuation movements.

Foreign-currency mismatch: Exposure created when liabilities and revenues are denominated in different currencies.

Devaluation: An official reduction in a currency’s parity under a fixed regime.

Depreciation: A decline in currency value determined through market or discretionary movement.

Review Questions

Short Answer Questions

1. What is an exchange-rate regime?
2. Why did the Bretton Woods system collapse?
3. Distinguish sterilised from unsterilised intervention.
4. What is a currency board?
5. State the three components of the policy trilemma.

Long Answer Questions

1. Compare the economic benefits and costs of fixed and floating exchange rates.
2. Explain the evolution from the classical gold standard to the contemporary international monetary system.
3. Discuss the role of reserve currencies in international liquidity and global finance.
4. Explain first-, second- and third-generation theories of currency crises.
5. Evaluate the institutional conditions required for a credible currency board.

Analytical / Application Questions

1. A country fixes its currency, permits unrestricted capital flows and attempts to reduce domestic interest rates below those of the anchor country. Use the policy trilemma to analyse the likely pressures.
2. A corporation earns revenue in domestic currency but has substantial dollar debt. Analyse the effects of a 20% domestic-currency depreciation and recommend risk-management actions.
3. Using the illustrative currency-board case, explain why a reserve-coverage ratio above 100% may still fail to guarantee convertibility during a crisis.

Multiple Choice Questions with Answers

Question 1

Which feature best characterises the Bretton Woods system?

A. All currencies were freely floating without official intervention

B. Currencies were pegged to the US dollar, with the dollar linked to gold for official holders

C. All participating currencies were directly convertible into silver

D. Domestic monetary policy was completely unrestricted under fixed rates

Correct Answer: B. Currencies were pegged to the US dollar, with the dollar linked to gold for official holders

Question 2

Under a currency board, the monetary base is normally linked most directly to:

A. Domestic budget deficits

B. Eligible foreign-reserve assets

C. Stock-market capitalisation

D. The country’s current-account deficit

Correct Answer: B. Eligible foreign-reserve assets

Question 3

If a central bank buys foreign currency and offsets the resulting liquidity creation by selling domestic securities, the intervention is:

A. Unsterilised

B. Sterilised

C. A devaluation

D. A capital control

Correct Answer: B. Sterilised

Question 4

Which combination is inconsistent with the policy trilemma as a sustainable long-run arrangement?

A. Fixed exchange rate, capital controls and monetary autonomy

B. Floating exchange rate, capital mobility and monetary autonomy

C. Fixed exchange rate, capital mobility and independent monetary policy

D. Fixed exchange rate, capital mobility and monetary policy aligned with the anchor country

Correct Answer: C. Fixed exchange rate, capital mobility and independent monetary policy

Question 5

At a peg of 10 domestic units per dollar, $130 billion of reserves are worth how much in domestic currency?

A. 13 billion domestic units

B. 130 billion domestic units

C. 1,300 billion domestic units

D. 13,000 billion domestic units

Correct Answer: C. 1,300 billion domestic units

Question 6

A firm borrowing in dollars while earning revenues in domestic currency is most directly exposed to:

A. A favourable balance-sheet effect from domestic depreciation

B. A foreign-currency mismatch

C. Elimination of translation risk

D. A guaranteed reduction in debt service

Correct Answer: B. A foreign-currency mismatch

Question 7

Which is a central advantage of a floating exchange rate?

A. It guarantees stable import prices

B. It eliminates all currency volatility

C. It permits greater monetary-policy autonomy

D. It prevents capital outflows

Correct Answer: C. It permits greater monetary-policy autonomy

Question 8

In a first-generation currency-crisis model, a fixed exchange rate becomes vulnerable primarily because of:

A. Persistent policy inconsistency and reserve depletion

B. Excessive labour mobility

C. A complete absence of fiscal deficits

D. A permanent increase in export productivity

Correct Answer: A. Persistent policy inconsistency and reserve depletion

Question 9

Why can a devaluation worsen a banking crisis?

A. It reduces the domestic value of foreign-currency liabilities

B. It increases the domestic-currency burden of unhedged foreign-currency debt

C. It automatically increases foreign reserves

D. It guarantees lower interest rates

Correct Answer: B. It increases the domestic-currency burden of unhedged foreign-currency debt

Question 10

Which statement about a managed float is most accurate?

A. The exchange rate is legally fixed forever

B. The market has no role in determining the exchange rate

C. Authorities allow market determination but may intervene to influence movements

D. The domestic currency is fully backed by gold

Correct Answer: C. Authorities allow market determination but may intervene to influence movements