Discuss how exchange rates are determined in currency markets that have flexible exchange rates
Answer:
There are three major types of exchange rate systems, Free-floating exchange rate system, Managed float system and Fixed exchange rates.
In a Free-floating exchange rate system, the government and central bank don't intervene in the forex market. But in the present monetary system, all governments and central banks try to regulate exchange rates in the market.
The major drawback in the Free-floating exchange rate system lies in the unpredictability of the exchange rates.
In a Managed float system the government and central banks intervene from time to time to appreciate and depreciate the value of their currency in order to control the volume of exports and imports of goods and services of their country.
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