Exchange Rates (HL)

An exchange rate is the price of one currency expressed in terms of another—for example, $1.20 per euro. Because exchange rates determine the relative prices of a country's exports and imports, they are among the most important prices in an open economy. Exchange rates are set within different systems: floating, fixed, and managed.

Exchange rate systems

Under a floating exchange rate, the currency's value is determined purely by the market forces of demand and supply, with no central-bank intervention. Under a fixed exchange rate, the government or central bank pegs the currency to another currency (or basket) and intervenes—buying or selling reserves and adjusting interest rates—to hold the peg. A managed float (or "dirty float") is a hybrid: the rate is broadly market-determined but the