c






 

This is the rate that is used to weigh the value of a currency in relation to how much of another
currency it can buy or can be exchanged with. Foreign exchange rates of a currency to other
international currencies mainly depends on the type of the exchange rate regime that has been
adopted in the country and include the following.

c




This is where the government through its policies fixes the rates at a given value and incase it
rises or drops ,the government interferes to buy international currencies through the central
bank.

The main criticisms to this regime are;

‘p ÷t doesn͛t automatically adjust the balance of trade thus incase of a trade deficit
the demand for foreign currency increases and this will lead to increased price of
the foreign currency compared to the domestic currency.
‘p The government must have to spend more resources piling up foreign currency
so that incase the fixed rate changes they can afford to bring back the rate by
buying more foreign currency.

c




This is the regime where the rate of exchange depends on supply and demand .This is the most
preferred exchange rate regime as it allows the economy to automatically adjust back to full
employment level with minimum government intervention.

c





This is the regime where the domestic currencies value depends on the foreign exchange
market, such a currency is called a floating currency.






This is the regime where the domestic currency is linked with another currency. The
government does not interfere with the foreign exchange market under this regime.


3 
 





J government may decide to control the rates to ensure that the citizens and other
international financial institutions who may be interested in using the domestic currency for
either imports or exports abide to the rules set by the government or by the central bank.

The government may decide to control the foreign exchange rates by:

@p ¦




½ By this the government ensures there is minimum
contact between the citizens and foreign currencies as it͛s the government who
interferes directly with the exchange rate and not like that of a flexible exchange rate
where the rate depends on demand and supply.
@p 3 

  

 


½ this assures the
government that the amount of domestic currency outside the country is not in excess
of what is required and that the amount of foreign currency in the country is not
excessive thus it can hardly reach out to the general public.
@p 





½ this is to ensure minimum access to
foreign currencies by the citizens thus they cannot carry out any transaction using
foreign currencies in the country.
@p 3 
  


   
This is done by government
policies, rules, and conditions that one must satisfy before handling foreign currencies in
the country.

3  

From the above illustrations we realize that foreign exchange rate depends mostly on
governments decisions and the type of exchange rate regime that has been adopted.