The supply of a currency is determined by the domestic demand for imports from abroad. For example, when the UK imports cars from Japan it must pay in yen (¥), and to buy yen it must sell (supply) pounds. The more it imports the greater the supply of pounds onto the foreign exchange market.
The economics of supply and demand dictate that when demand is high, prices rise and the currency appreciates in value. In contrast, if a country imports more than it exports, there is relatively less demand for its currency, so prices should decline. In the case of currency, it depreciates or loses value.
The correct answer is option 3, i.e. Managed floating exchange rate system. In the Managed floating exchange rate system, the foreign exchange rate is determined by the market forces and the central bank influences the exchange rate through involvement in the foreign exchange market.
Answer: Supply curve of foreign exchange slopes upwards due to positive relationship between supply for foreign exchange and foreign exchange rate, which means that supply of foreign exchange increases as the exchange rate increases.
In a freely floating exchange rate system, the forces of demand and supply cause the exchange rate to settle at the point where the quantity of a currency demanded equals quantity supplied.
An expectation of a future shift in the exchange rate affects both buyers and sellers—that is, it affects both demand and supply for a currency. The shifts in demand and supply curves both cause the exchange rate to shift in the same direction; in this example, they both make the peso exchange rate stronger.
Terms in this set (24) A country's exchange rate regime where its currency is set by the foreign-exchange market through supply and demand for that particular currency relative to other currencies. Thus, floating exchange rates change freely and are determined by trading in the forex market.
The 5 Determinants of Demand The price of the good or service. The income of buyers. The prices of related goods or services—either complementary and purchased along with a particular item, or substitutes bought instead of a product. The tastes or preferences of consumers will drive demand.
aggregate supply and demandSummary. Currency value is determined by aggregate supply and demand. Supply and demand are influenced by a number of factors, including interest rates, inflation, capital flow, and money supply. The most common method to value currency is through exchange rates.
The Supply of Foreign Exchange The total quantity of the different goods and services, which a country can export and, therefore, the quantity of foreign currencies which it can acquire depends upon how many the residents of the foreign currencies are willing to import from a particular country.