What is free or flexible exchange rate?

The floating exchange rate system is designed to be responsive to economic changes, allowing the market to efficiently allocate resources and adjust to shifting conditions. It promotes international trade and investment by providing flexibility and adaptability.

The concept of flexible or floating exchange rates revolves around the dynamics of market forces. This system allows the exchange rate of a currency to fluctuate based on the intricate interplay between supply and demand.

In a floating exchange rate environment, the value of a currency is not fixed or dictated by a central authority. Instead, it is subject to the continuous shifting of market sentiments and economic factors.

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When the demand for a particular currency surpasses its supply, it triggers an appreciation in the value of that currency. This means that the currency becomes stronger against other currencies, making it more valuable for international transactions.