Objectives of the Chapter

This chapterdeals with the nature and organization of the foreign exchange market. At itsmost basic, the equilibrium exchange rate can be thought of as the price thatequates the international supply of and demand for a country’s money. Forexample, the exchange rate on the British pound (expressed as American dollarsper British pound) would be determined by the supply of pounds arising fromBritish purchases of American goods, services, and assets, and by the demandfor British pounds arising from American purchases of British goods, services,and assets.

You might want totrack a few of the major currencies and related commentaries in the dailylistings in the financial press.

After studyingChapter 17 you should be able to identify

     1.    what an exchangerate is.

     2.    what thereciprocal of the exchange rate means.

     3.    the organizationof the modern foreign exchange market.

     4.    the distinctionbetween spot and forward exchange rates.

     5.    determinants ofdemand and supply for foreign exchange.

     6.    how a system offlexible foreign exchange rates works.

     7.    how a system offixed foreign exchange rates works.