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Dear John,
Could you please explain this sentence: ( This is copied from ACCA exam – June 2015)(2) When governments adopt a floating exchange rate system, the exchange rate is an equilibrium between demand and supply in the foreign exchange market.
Why this sentence is true? What does it mean at all?!!!
Thank you
Currencies (when the exchange rate is allowed to float i.e. fluctuate) are like any other product. If a product is sold in a shop and if there is big demand but only a limited amount available, then the price will increase. If on the other hand there is a big supply of the product but not many people are buying then the price will fall (to encourage people to buy).
This is explained in Chapter 22 of the free lecture notes, and the free lectures that go with it.
The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
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