Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

 
 
10.6 SUMMARY 
1. While dealing with international trade with each other, the 
transactions are made through foreign exchange. Foreign 
exchange rate is the price of one nation
‘s currency in terms of the 
currency of another nation. 
2. The two prominent exchange rate systems are Fixed exchange 
rate system (Pegged system) and Flexible exchange rate system ( 
Fluctuating system).
3. Fixed exchange rate is fixed by the government by means of 
pegging operations.(Buying and selling exchange at a particular 
rate).Government follows exchange control to keep the rates 
stable. It helps to reduce the exchange reserves. 
4. Free exchange rate theory is also known as the Demand and 
Supply theory and the General Equilibrium theory of exchange rate 

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or Balance of trade Theory. It holds that the foreign exchange rate, 
under free market conditions, is determined by the conditions of 
demand and supply in the foreign exchange market. 
5. The Mundell - Flemming model was developed by Robert 
Mundell and Marcus Fleming in the 1960s. It is an extension of the 
standard Keynesian IS 
– LM model than open economy. It analyses 
new monetary and fiscal policies work is an open economy that is 
characterized by absolute exchange rate flexibility and perfect 
mobility. 
6. The real exchange rate is the relative price of two currencies 
after adjusting for change in domestic prices. 
10.7 QUESTIONS 
 
1. Bring out the difference between Fixed and Flexible exchange 
rate system. 
2. Explain BOP theory of determining exchange rate in free market. 
3. Explain Mundell-Fleming model in brief. 
4. Write a note on Real exchange rate.