Macroeconomics: Theory and Policy

22

Foreign Exchange

After studying this topic, you should be able to understand

• In a foreign exchange market foreign, currency (or foreign exchange) is purchased and sold by individuals, firms, commercial banks and the central banks of the different countries.
• Two types of foreign exchange transactions are spot transaction and forward transaction.
• The exchange rate reflects the purchasing power of one country’s currency in terms of the purchasing power of another country’s currency.
• Two nominal exchange rate systems are flexible or floating exchange rate system and fixed exchange rate system.
• As to how the exchange rate is determined, will depend on whether the exchange rates system is a flexible or a fixed exchange rate system.
• In a flexible ...