FLEXIBLE EXCHANGE RATE

FLEXIBLE EXCHANGE RATE Under the floating or flexible exchange rate, the exchange rate is allowed to vary to international foreign market market influences. Thus government does not intervene , rather in the market forces that determine the exchange rate. In fact, automatic variations in exchange rate consequent upon a change in the market forces are the essence of freely flexible exchange rate. A deficit in the balance of payment account means an excess supply of the domestic currency in the world market. As price declines, imbalances are removed. In other words excess supply of domestic currency will automatically cause a fall in the exchange rate and balance of payments balance will be restored. Flexible exchange rate mechanism has been explained in the figure where DD and SS are demand and supply curves. When Indian buy US goods there arises supply of dollar and when US people buy Indian goods there occurs demand for rupee. The initial exchange rate RS 40= $1...