Which of the following option tells us the exchange rate at which demand for a currency is equal to its supply?
Answer & explanation
Correct answer: option 2
The correct answer is Option 2: Equilibrium exchange rate
The equilibrium exchange rate is the rate at which the demand for a currency equals its supply.
In contrast:
- Floating exchange rate refers to a system where the exchange rate is determined by market forces without direct government or central bank intervention. In floating exchange rate, the demand and supply forces determine the equilibrium exchange rate but it is not necessary that in floating exchange rate both demand and supply will always be equal. Even when demand is greater than supply or vice versa, still the exchange rate system will be floating exchange rate.
- Fixed exchange rate is a rate that is set and maintained by a country's government or central bank, not necessarily reflecting the market's demand and supply.
. The exchange rate at which demand for foreign currency is equal to its supply is called as Normal Rate or Equilibrium Rate of foreign exchange.