Welcome to the NCERT Solutions for Class 12 Macro Economics - Chapter Open Economy Macroeconomics. This page offers a step-by-step solution to the specific question from Exercise 1, Question 6:
How is the exchange rate determined under a flexible exchange rate regime?
. With detailed answers and explanations for each chapter, students can strengthen their understanding and prepare confidently for exams. Ideal for CBSE and other board students, this resource will simplify your study experience.How is the exchange rate determined under a flexible exchange rate regime?
Under a flexible exchange rate regime, the rate of exchange is determined by the forces of demand and supply. In other words, the equilibrium rate of exchange occurs where demand and supply are equal to each other. This can be illustrated with the help of the given figure:
In the figure, x-axis represents demand for and supply of foreign currency and y-axis represents the exchange rate. DD is the demand curve that is downward sloping, showing an inverse relationship between the rate of exchange and demand for foreign currency. Whereas, the supply curve is upward sloping, showing a positive relationship between the rate of exchange and the supply of foreign currency. E is the equilibrium rate of exchange, where the demand equates the supply of foreign exchange (OR).
Now, if the exchange rate rises to OR1, then the supply exceeds the demand, forcing the exchange rate to fall back to OR. On the contrary, if the exchange rate falls to OR2, there is excess demand over supply. Hence, the rate of exchange rises from R2 to R.
Hence, the equilibrium exchange rate (OR) is determined by demand and supply of foreign currency.
NCERT questions are designed to test your understanding of the concepts and theories discussed in the chapter. Here are some tips to help you answer NCERT questions effectively:
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Welcome to the NCERT Solutions for Class 12 Macro Economics - Chapter . This page offers a step-by-step solution to the specific question from Excercise 1 , Question 6: How is the exchange rate determined under a flexible exchange rate regime?....
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