ECONOMICS
TRADE EXCHANGE AND INTERDEPENDENCE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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the government/central bank entirely or predominantly determines the exchange rate.
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the forex market entirely or predominantly determines the exchange rate.
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the trading partners entirely or predominantly determines the exchange rate.
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the importing countries entirely or predominantly determines the rate.
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Detailed explanation-1: -A fixed exchange rate is a regime applied by a government or central bank that ties the country’s official currency exchange rate to another country’s currency or the price of gold. The purpose of a fixed exchange rate system is to keep a currency’s value within a narrow band.
Detailed explanation-2: -The fixed exchange rate is determined by the government or the central bank. They fix or peg the rate to another currency (like the US dollar) or a basket of currencies. The central bank is in charge of maintaining the exchange rate at the target rate.
Detailed explanation-3: -A fixed exchange rate – also known as a pegged exchange rate – is a system of currency exchange in which the value of one currency is tied to another.
Detailed explanation-4: -A floating exchange rate is a regime where the currency price of a nation is set by the forex market based on supply and demand relative to other currencies. This is in contrast to a fixed exchange rate, in which the government entirely or predominantly determines the rate.
Detailed explanation-5: -To maintain the fixed exchange rate, the central bank must intervene and sell foreign exchange to buy domestic currency. The foreign exchange market intervention will decrease the domestic money supply and shift the LM curve back to LM to restore the initial equilibrium at e.