(a) What is foreign exchange rate?
(b) How it is determined under fixed and flexible exchange rate system?
(a) What is foreign exchange rate?
(b) How it is determined under fixed and flexible exchange rate system?
(a) The rate at which one currency is exchanged for another is called foreign exchange rate. It is the price of country's currency in terms of another currency, e.g., 1$ = RS 50.
(b) It is determined differently in different foreign exchange systems.
(1) Fixed exchange rate system: Under this system, the government or monetary authority determines or specifies the rate at which the domestic currency will be exchanged for foreign currency. No changes are allowed in the foreign exchange rate by the market.
(2) Flexible exchange rate system: Flexible exchange rate is a system where the value of one currency exchanged in terms of another is free to fluctuate and establish the equilibrium level through the forces of demand and supply. The market is allowed to play without any interventions.
(a) The rate at which one currency is exchanged for another is called foreign exchange rate. It is the price of country's currency in terms of another currency, e.g., 1$ = RS 50.
(b) It is determined differently in different foreign exchange systems.
(1) Fixed exchange rate system: Under this system, the government or monetary authority determines or specifies the rate at which the domestic currency will be exchanged for foreign currency. No changes are allowed in the foreign exchange rate by the market.
(2) Flexible exchange rate system: Flexible exchange rate is a system where the value of one currency exchanged in terms of another is free to fluctuate and establish the equilibrium level through the forces of demand and supply. The market is allowed to play without any interventions.
