Flexible Exchange Rate System

A flexible exchange rate system is when a country's currency value is determined by the foreign exchange market based on supply and demand. Unlike fixed systems, where a government sets and maintains a specific rate, flexible rates fluctuate naturally as investors buy and sell currencies. Factors influencing these changes include economic data, interest rates, and global market conditions. This system allows for automatic adjustments to economic shifts, helping countries respond to external shocks. However, it can also lead to greater currency volatility, affecting international trade and investments.