Floating Exchange Rate

• What is it? Exchange rate determined solely by demand and supply, with no government intervention.
• Real-World Example: The pound and the dollar fluctuate in value. From £1.00 = $1.2037 (5 August 2019) to £1.00 = $1.3325 (9 December 2019), the pound appreciated. From £1.00 = $1.3325 to £1.00 = $1.1650 (16 March 2020), the pound depreciated.

Fixed Exchange Rate

• What is it? Government sets the rate and keeps it there through intervention.
• Real-World Example: Denmark's krone (Kr) is fixed to the euro at €1.00 = Kr7.468 within a 2.25% band. If the rate changes to €1.00 = Kr7.60, the krone is devalued. If €1.00 = Kr7.30, it's revalued.

Managed Exchange Rate

• What is it? The rate floats but is periodically adjusted by the central bank.
• Real-World Example: Most currencies operate under a "managed float" system. The central bank might intervene to prevent undesirable changes in value.

• Appreciation: Increase in currency's value in a floating system.
• Depreciation: Decrease in currency's value in a floating system.
• Revaluation: Official increase in currency's value in a fixed system.
• Devaluation: Official decrease in currency's value in a fixed system.

Demanding Pounds (For example)

• Buyers of UK Goods: An American store buying Burberry coats needs pounds.
• Investors in UK: Investing in bonds, shares, or businesses in the UK.
• Speculators: People who buy pounds expecting them to rise in value.

Supplying Pounds

• UK Importers: A British firm buying Abercrombie & Fitch shirts needs dollars, so they sell pounds.
• British Investors in the USA: Buying US bonds or establishing a business in the US.
• Expecting a Decrease in Value: Selling pounds now to buy later at a lower price.