There is no simple answer to this question. it depends on whether forex market is free or controlled, and whether the government adopts fixed or flexible exchange rate policy. The economists have attempted to explain the exchange rate determination resulting in different kinds of theories the market theory, the purchasing power parity theory, the monetary theory and the portfolio- balance theory. In this section, we will discuss only the first two theories which are in currency - first the market theory of exchange rate determination and then the purchasing power parity theory.
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