Question

Under Flexible Exchange Rates, equilibrium is reached at which condition?

Options

• Government / Central Bank (RBI) fixes the rate

• Demand (DD) is greater than Supply (SS)

• Demand (DD) = Supply (SS)

• Supply (SS) is greater than Demand (DD)

Answer 1

Equilibrium under Flexible Exchange Rates is reached where Demand (DD) equals Supply (SS). At this point, the demand and supply of foreign exchange determine the equilibrium exchange rate.