Question : The foreign exchange rate is determined by:
Option 1: Central banks
Option 2: Stock markets
Option 3: Government policies
Option 4: Supply and demand in the foreign exchange market
Correct Answer: Supply and demand in the foreign exchange market
Solution : Foreign exchange rates are determined by the forces of supply and demand in the foreign exchange market. The foreign exchange market is where individuals, companies, and governments buy and sell currencies. The exchange rate is simply the price of one currency in terms of another currency.
When there is a high demand for a particular currency, its value relative to other currencies will typically rise. Conversely, when there is a low demand for a currency, its value will typically fall. Factors that can influence supply and demand in the foreign exchange market include economic and political conditions, interest rates, inflation rates, and global trade flows. While central banks and government policies can indirectly influence the exchange rate by affecting these factors, the exchange rate itself is ultimately determined by market forces.
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