Question

Foreign exchange rate is determined by

• A. Demand of foreign currency
• B. Supply of foreign currency
• C. Demand and supply in foreign exchange market
• D. None of these

Hint:

Like the price of almost everything else in a market economy, the price of a currency (its exchange rate) is set by demand and supply.

Answer 1

The Correct Option is C

In a floating exchange rate system, which is used by most major economies, the value of a currency is determined by the market forces of supply and demand in the foreign exchange market. The exchange rate will adjust to the level where the quantity of the currency demanded equals the quantity supplied.