ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The equilibrium exchange rate is the exchange rate at which demand equals supply. Q. The exchange rate at which demand for foreign currency becomes equal to its supply is called the exchange rate.

Detailed explanation-2: -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-3: -The equilibrium exchange rate is the interaction of the supply of a currency and the demand for a currency. As in any market, the foreign exchange market will be in equilibrium when the quantity supplied of a currency is equal to the quantity demanded of a currency.

Detailed explanation-4: -Supply curve of foreign exchange slopes upwards due to positive relationship between supply for foreign exchange and foreign exchange rate, which means that supply of foreign exchange increases as the exchange rate increases.

Detailed explanation-5: -In a floating regime, exchange rates are generally determined by the market forces of supply and demand for foreign exchange. For many years, floating exchange rates have been the regime used by the world’s major currencies – that is, the US dollar, the euro area’s euro, the Japanese yen and the UK pound sterling.