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Chapter 16: Q.10 (page 406)

What is the foreign exchange market?

Short Answer

Expert verified

The foreign exchange demand in the market on which other country's (international) funds (currency bank balances, banknotes, drafts, and checks) are traded.

Step by step solution

01

Concept introduction

It is not physically located in just one location.

It can be considered as a network of banks, foreign exchange dealers, brokers which travels globally.

02

Explanation

Foreign exchange market is a structure in which the exchange of different currencies takes place. The rate of exchange is generally determined by the demand and supply. Though the demand for currencies works normally as demand for goods and services, the supply can be controlled by the government. Currencies are demanded by buyers to pay for imports or to make investment in foriegn countries.

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Most popular questions from this chapter

This chapter has explained that “one of the most economically destructive effects of exchange rate fluctuations can happen through the banking system,” if banks borrow from abroad to lend domestically. Why is this less likely to be a problem for the U.S. banking system?

Describe some buyers and some sellers in the

market for U.S. dollars.

Does a higher rate of return in a nation’s economy, all other things being equal, affect the exchange rate of

its currency? If so, how?

Does an expectation of a stronger exchange rate in the future affect the exchange rate in the present? If so, how?

What would make a country decide to change from a common currency, like the euro, back to its own currency?
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