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Foreign Exchange and Exchange Rate

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Question

Short Answer Type Questions:
How is exchange rate determined in the foreign exchange market? Explain.

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Solution

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.
Whereas, under fixed exchange rate system, government fixes the rate.

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