What is Foreign Exchange Rate and its classification/behavior?


Foreign Exchange Rate and its classification/behavior
Foreign exchange rate is the price of one currency in terms of another currency.For example: $ 1= Tshs550. It means 550 is the price of American dollar in terms of shillings.
We can distinguish three types of exchange rate behaviors
Freely fluctuation exchanges rate.
This behavior occurs when there are no government restrictions on private trading in the foreign exchange market. The exchange rate fluctuates daily and even hourly in response to changes in the supply and demand of foreign currencies
Stable exchange rate.
This occurs when government authorities follow a policy of stabilization but they do not interfere with private market transaction in the foreign exchange market.  The government sets limit within a freely determined range e.g. The government may not want price of dollar to fall below Tsh. 500 or above Tsh. 600/=
Controlled exchange rate.
This occurs when the government restricts private transactions so that it becomes the only buyer or seller of foreign exchange. The exchange rate is no longer determined by the forces of demand and supply instead it is determined by bureaucratic decisions.

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