What is an Exchange Rate?
In a market system, the price of the currency is the exchange rate. This price is determined by the interaction of supply and demand.
This rate has an important impact on the level of exports and imports as it impacts on the end price in the purchasers dollars.
A floating rate is one where the rate is determined by market forces. So a floating exchange rate allows the exchange rate to adjust to the economic forces on a country’s currency.
However many countries have a fixed or regulated rate to have government control on the economy. They do this to maintain the correct level of imports or exports in and out of the country.
This infographic shows how a floating exchange rate is determined by market forces.
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