Foreign Exchange Rate Systems and Parity Relationships
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There are two major categories of exchange rate systems:
- Flexible or Floating – laws of supply and demand determine currency value
- Fixed – the government pegs the exchange rate value and actively participates in currency markets to maintain the value
The market quotes nominal exchange rates whereby a unit of once currency can be exchanged for some amount of another currency. The real exchange rate reflects the price level differentials of the currencies being exchanged.
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