Floating Exchange Rates
Exchange Rates
AO2·AO4·Diagram required
Syllabus requirement
Determination of floating exchange rates based on market forces of demand and supply. Currency appreciation and depreciation explained.
Assessment objectives
AO2 Application and AnalysisAO4 Use of Appropriate Skills
Required diagram: Diagram showing the intersection of demand and supply for a currency in a floating exchange rate system and shifts that lead to appreciation or depreciation.
Summary
This section explains floating exchange rates, where currency values are set by demand and supply in the foreign exchange market. It shows how appreciation and depreciation occur, how to draw and label currency market diagrams, and why a change in demand for one currency implies a change in supply of another. It then outlines key drivers of currency demand and supply, including trade flows, FDI, portfolio investment, and remittances, using real examples.