What describes a floating exchange rate?

A floating exchange rate is characterized by a value that fluctuates based on the forces of market demand and supply. This means that the currency's value can change frequently, influenced by various factors such as economic indicators, market speculation, interest rates, and political stability. In a floating exchange rate system, no fixed rate is enforced by a government or central authority; instead, the currency’s value is determined by the market's trading activity.

This is distinctly different from a fixed exchange rate, where a government sets a specific value for its currency against another currency, providing stability but limiting flexibility. Similarly, a constant rate over time does not reflect the dynamic nature of currency values in response to economic conditions. Lastly, a pegged exchange rate ties a currency's value to another currency, which is not true for a floating exchange rate, where such a direct link does not exist. Thus, highlighting option B effectively captures the essence of a floating exchange rate.