Question

In a floating exchange rate regime, if the demand for a country's exports increases, its currency will typically:

Q: Answer-In a floating exchange rate regime, if the demand for a country's exports increases, its currency wi...

Under a floating exchange rate , the value of a currency is determined by market forces of demand and supply. An increase in demand for a countrys exports means foreign importers need more of the domestic currency to pay for those goods. This increases the demand for the domestic currency in the foreign exchange market. With supply constant, increased demand leads to an appreciation increase in value of the domestic currency relative to other currencies. Devaluation is a deliberate policy action in a fixed or managed regime, not an automatic market outcome.