Concept Introduction:
Equilibrium in Exchange Market:
It is the point where the demand for a currency is equal to the supply of currency in the exchange market. Under the fixed exchange rate, 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.
It includes money supply changes. When money supply increases, aggregate demand curve shifts rightward and vice versa.
To explain: The reason for fixed exchange rate.
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