How are exchange rates determined?

Question

Quizplus · Accepted Answer

Exchange rates are determined by the forces of demand and supply. The demand for foreign currency is determined by factors such as imports, investments, and tourism, while the supply of foreign currency is determined by factors such as exports, foreign investments, and remittances. When demand for foreign currency exceeds supply, the exchange rate appreciates, and when supply exceeds demand, the exchange rate depreciates. Therefore, exchange rates fluctuate to equate the quantity of foreign currency demanded with the quantity supplied.

How Are Exchange Rates Determined