explain the process of determination of flexible foregion exchange rate
Under the system of flexible exchange rate, the rate of exchange is determined by the market forces (demand for foreign exchange and supply of foreign exchange) with minimum or no government intervention. The equilibrium exchange rate is determined by the intersection of the demand and supply curves for foreign currency.
In the above figure, DD is the demand curve for the foreign currency and SS is the supply curve of the foreign currency. The point E is the point of intersection, where, the demand and the supply curve intersects each other. At this point, both the demand and the supply of foreign currency equal each other. This represents the equilibrium in the foreign exchange market. Accordingly, OR represents the equilibrium exchange rate and OQ represents the quantity of foreign currency demanded and supplied.
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