How Exchange Rates Are Determined
9.2 Explain how exchange rates are determined.
In a free market, the price of any currency—that is, its exchange rate—is determined by supply and demand. Supply and demand adjust according to market forces. Exchange rates fluctuate constantly because the global market for most major currencies is free and active. Continuous shifts in the supply of and demand for dollars result in continuous changes in the dollar exchange rate. Some currencies are pegged to fixed exchange rates and, thus, may not respond to market forces.
In a free market, the levels of supply and demand for a currency vary inversely with its price. Thus, all else being equal,
The greater the supply of a currency, the lower its price.
The ...
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