Exchange Rate Determinition

Saturday, September 12, 2009

The foreign exchange value is determined by demand and supply. But what exactly do we mean by demand for and supply of dollars? There are, in fact, three different senses in which we can speak of the supplyof and the demand for dollars and all three have featured, at various times, in the theories of the determination of the foreign exchange rate:

1. Flow Theory
2. Monetary Theory
3. Portfolio balance theory