D Explain how exchange rates are determined in an opencurren

D. Explain how exchange rates are determined in an open-currency regime

Solution

The exchange rate is determined by the forces of supply and demand in the exchange market.

Other things remaining constant, if the demand for foreign exhange rises, its value (or market price) will also rise and if demand for foreign exchange falls, its value will also fall. Similarly, supply of foreign exchange also influences the exchange rate. Other things remaining constant, greater the supply, lower the rate of exchange.

Equilibrium exchange rate occurs where the supply of and demand for exchange are equal to each other.