How are exchange rates determined in a flexible exchange rate system?

A) US dollar compared to the euro

B) inflation and deflation C) US dollar compared to the pound

D) supply and demand

The correct option is D) supply and demand

Explanation:

In the foreign exchange market, there may be different types of exchange rate systems. A monetary system which depends on supply and demand is known to be a flexible exchange rate system. In contrast, a fixed exchange rate is a type of exchange system in which the rate is fixed by the government and monetary authority. In a flexible exchange rate system, every currency area is free to decide its exchange rate.