In the market for foreign-currency exchange, supply comes from net foreign investment, demand comes from the current account balance, and the real exchange rate balances supply and demand.

Question

Quizplus · Accepted Answer

This is a basic representation of the monetary approach to exchange rates, where the supply of a currency comes from net foreign investment and the demand for a currency comes from the current account balance. The real exchange rate is the price that balances supply and demand in the foreign exchange market.

In the Market for Foreign-Currency Exchange, Supply Comes from Net