- Exchange rate systems determine currency values.
Fixed and Adjustable Exchange Rate System
- A country fixes its exchange rate to another currency.
- It adjusts (devalues or revalues) the currency when needed.
- Example: India till 1993 ($1 = Rs. 1 in 1947, adjusted to Rs. 31 by 1993).
Floating Exchange Rate System
- Currency value depends on market forces of demand and supply.
- The central bank does not manipulate it.
- Free Float: Central bank never intervenes. Example: US, Japan.
- Managed Float: Central bank sometimes intervenes to manage volatility. Example: Indian Rupee.