Flexible Exchange Rate

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Flexible exchange rate as the term implies is a rate that is susceptible to change. What it means is that the rate will keep on fluctuating based on demand and supply in the market. It also means that there will be no interference from the central bank in determining this rate. The market economy spoken about till now reflects this system. America is one of the leading examples of a country following this scheme. The central bank at times can affect this flexible rate. For example if a country increases their rate of currency like the dollar than the demand for it increases in the world and this leads the currency to be valued at a higher level.  Again in reverse if the central banks reduce the value of the dollar, its demand will increase and the rate of exchange will decrease. It should be noted that whenever such a change of currency occurs then there is an ulterior economic objective of the country which has facilitated this change.

 

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