Flexible Exchange Rates Explained

This bendy sounding concept can be confusing - what is a flexible exchange rate - isn't this something that is always fixed at a particular point in time so what does it mean for it to be flexible?

Well all this actually refers to is the nothion of exchange rates being determined by the forces of supply and demand that are so familiar and well known to the theory of economy.

So if the only sort of movements were through trade then this would imply that the supply of the currency would be composed of the imports of that economy.

Similarly the demand for that currency would then be the exports that come out of that country, as the country that decides to buy goods will need to use that currency in order to pay for the goods. And that in turn leads to a demand for that currency, just as the opposite leads to a supply of that currency.

The idea then is simply that the supply and demand factors will bring the market to an equilbrium rate and that this rate will then ensure that the trade flows are in balance.

Of course trade is not the only flow and in the modern, information world there seem to be more and more ways in which money goes in and out of a country and changes form as a result, adding extra complexity, but this is the general idea!

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