ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -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.

Detailed explanation-2: -Exchange rates have what is called a spot rate, or cash value, which is the current market value. Alternatively, an exchange rate may have a forward value, which is based on expectations for the currency to rise or fall versus its spot price.

Detailed explanation-3: -An equilibrium exchange rate is here defined as the level that is consistent with simultaneous internal and external balances as specified in Montiel (1996). Exogenous “fundamental” variables determining these balances are identified.

Detailed explanation-4: -An equilibrium price is a balance of demand and supply factors. There is a tendency for prices to return to this equilibrium unless some characteristics of demand or supply change. Changes in the equilibrium price occur when either demand or supply, or both, shift or move.

Detailed explanation-5: -A floating exchange rate is one that is determined by supply and demand on the open market as well as macro factors.