ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Ëquilibrium rate of exchange is determined when the demand for foreign exchange is equal to its supply.

Detailed explanation-2: -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.

Detailed explanation-3: -A floating rate is determined by the open market through supply and demand on global currency markets. Therefore, if the demand for the currency is high, the value will increase. If demand is low, this will drive that currency price lower.

Detailed explanation-4: -In a free-floating exchange rate system, exchange rates are determined by demand and supply.

Detailed explanation-5: -The most important are five factors which are inflation, interest rate differentials, and differences in income level, government control and changes in expectations. These factors move the demand and supply schedule and create a new exchange rate in a new equilibrium condition.