Chapter 18, Problem 7P

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 system, 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.