With flexible exchange rates

Question

Quizplus · Accepted Answer

With flexible exchange rates, the equilibrium exchange rate is determined in a foreign exchange market based on supply and demand for different currencies. This means that the exchange rate can fluctuate to balance out any imbalances in trade and capital flows. The balance of trade can be positive or negative, and foreign exchange reserves may be used to intervene in the market, but they are not necessarily used to offset balance-of-payment deficits.

With Flexible Exchange Rates