Page 1 - Lesson note-Foreign Exchange (Module-58)
P. 1
Class XII
Subject- Economics
CHAPTER-11
TOPIC- Meaning and types of Foreign Exchange(MODULE-58)
Short Note:
Foreign Exchange: Refers to all currencies other than the domestic currency of a country.
Foreign Exchange Rate: Refers to the rate at which one currency is exchanged for the other.
TYPES of Foreign Exchange Rate:
1: Fixed Exchange Rate System: Refers to a system in which exchange rate for a currency is
fixed by the government.
a) Ensures economic stability
b) Government has to maintain a huge reserve of foreign currencies to maintain the
exchange rate.
2: Flexible Exchange rate system: Refers to a system in which exchange rate for a currency is
determined by demand and supply of different currencies in the foreign exchange market.
a) The value of currency is allowed to fluctuate freely accordingly to the change in
demand and supply.
b) There is no official intervention of the government.
c) It is also known as “Floating exchange rate”
3: Managed Floating: Refers to a system in which foreign exchange rate is determined by
market forces and central bank influences the exchange rate through intervention in the
foreign exchange market.
a) It is a hybrid of fixed exchange and flexible exchange rate system
b) Central bank intervenes to restrict the fluctuation.
c) Central bank keeps a large reserve to ensure that the exchange rate stays within a
targeted value.
d) It is known as “Dirty floating”
Demand for foreign Exchange:
1: Import for Goods and Services
2: Tourism
3: Unilateral Transfer sent abroad
4: Purchase of assets in foreign countries
5: Speculation:
Reason for Rise in Demand for Foreign Currency:
