In this chapter we shall study the market (or rather markets) for foreign exchange. We shall use a very simple model to analyse some of the factors that determine the demand for and supply of foreign exchange, one in which we shall ignore the role that may be played by assets and concentrate on that played by trade in goods and services. We shall consider an assets-based model of exchange rate determination in Chapter 26. We shall also demonstrate in this chapter how the market for foreign exchange is cleared under a system of flexible exchange rates.
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