2. a) Explain using a suitable diagram how the exchange rate is detennined under
ID: 1101546 • Letter: 2
Question
2. a) Explain using a suitable diagram how the exchange rate is detennined under a flexible exchange rale system. What factors detennine the demand for foreign exchange and what factors determine the supply of foreign exchange
(b) Explain llsing a suilable diagram for each part (below) what will happen to the value of a country's currency (i.e. appreciate or depreciate) tn the foreign exchange market as a result of the following
1.the country implements a expansionary monctary policy
2. if there was a significant rise in export from this country
3. if inflation rate in this country was relatively higher than those in other countries
Explanation / Answer
Determining exchange rates
There are a number of methods that can be used to determine an exchange rate:
A flexible or floating exchange rate is where the market forces of supply and demand determine the exchange rate.
A fixed exchange rate is where the government determines the exchange rate for a period of time based on the value of another country
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