ECONOMICS
FOREIGN CURRENCY MARKETS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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equal
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not equal
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Either A or B
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None of the above
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Detailed explanation-1: -At the equilibrium exchange rate, the supply and demand for a currency are equal. Shifts in the supply or demand for a currency lead to changes in the exchange rate. Because one currency is exchanged for another in a foreign exchange market, the demand for one currency entails the supply of another.
Detailed explanation-2: -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-3: -The answer is (b) imports-exports = net capital inflow.
Detailed explanation-4: -The equilibrium exchange rate is the long-term exchange rate that equals the purchasing power parity (PPP) of a currency in a world where all goods are traded and where markets are fully efficient.
Detailed explanation-5: -The equilibrium exchange rate is determined at a point where demand for and supply of foreign exchange are equal. Graphically intersection of demand and supply curves determine the equilibrium exchange rate of foreign currency.