Question

The exchange rate in an economy is determined by:

Options

• The volume of domestic trade alone

• The fiscal policy of the government alone

• The price of gold in the domestic market

• The demand for and supply of foreign exchange in the foreign exchange market

Answer 1

The exchange rate is determined by the interaction of the demand for and supply of foreign exchange in the foreign exchange market. Demand arises from sources like imports and outbound tourism, while supply arises from exports, remittances, and investment inflows.