Chapter 18, Problem 10P

To determine

Concept Introduction:

Equilibrium in Exchange Market:

It is the point where the demand for a currency is equal to the supply of a currency in the exchange market. Under the fixed exchange rate, government intervention ensures such a point.

Fixed Exchange Rate:

This is an exchange rate system under which there is an intervention by the government to control the fluctuation and this is known as fixed exchange rate.

Nominal Exchange Rate:

The rate at which currencies are exchanged in the exchange market is known as the nominal exchange rate.

Flexible Exchange Rate:

This is an exchange rate system under which there is no intervention by the government, rather the rate is determined by the demand and supply phenomenon.

To explain: The way to keep the exchange rate at a fixed value in the case of an increase in the demand of goods and services.