Question

1. How are foreign exchange rates determined.?

Answer 1

There are two ways through which the country determines the foreign exchange rates, the first includes the fixed exchange rate where the countries agree to fix there exchange rates with an agreement, and the second includes determination of the exchange rate through the market forces which is known as the flexible exchange rate and in this regime countries do not have to maintain the fixed exchange rate. Under fixed exchange rate system countries peg there exchange rates with the possibility of adjustment within the predetermined level such as +-2%. On the other hand, under flexible exchange rate system the demand and supply for the foreign currency determines the exchange rate and the central banks do not interfere in the determination of exchange rate.