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Determination of Exchange Rates in a Free Market

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Using an example to explain your response, describe how exchange rates are determined in a free market.

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Solution Summary

The demand for any currency is derived from the demand for goods and services form the respective country. This is discussed further in almost 250 words within, using an example.

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Exchange rate is the price of one currency in terms of another currency. For example, if we wanted to know the price of US $ in terms of UK £, the exchange rate is defined as $/£. Alternatively, if we wanted to know the price of UK £ in terms of US $, we will write the exchange rate as £/$.

The value of the exchange rate is ...

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