Long Answer Type Questions :
"Equilibrium rate of exchange is determined when the demand for foreign exchange is equal to its supply." Explain this statement,

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Solution

The equilibrium exchange rate determined in the foreign exchange market is determined by the flexible rate of exchange.Flexible rate of exchange is the rate which is determined by the supply-demand forces in the foreign exchange market. It is also called 'free exchange rate' as it is determined by the free play of supply and demand forces in the international money market. Thus, equilibrium exchange rate is determined when the demand and supply for foreign exchange becomes equal.

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