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What is meant by the rate of exchange?
(A) The gap in value between the total amount of goods a country imports compared to its exports
(B) The difference in value between two goods that are exchanged between countries
(C) The rate at which people are either moving out of or into a particular country
(D) The price at which one nation's currency can be bought using another nation's currency

The correct option is D. The price at which one nation's currency can be bought using another nation's currency is called the rate of exchange. The amount you can swap from one currency for another is known as the exchange rate. A currency's exchange rate is the cost at which two different currencies can be converted between two different countries or economic regions. It is used to calculate the value of different currencies in relation to one another and is crucial in figuring out how trade and capital flows operate.

Who decides the exchange rate?

Exchange rates in a floating regime are typically governed by the forces of supply and demand for foreign currency. The US dollar, the euro of the euro region, the Japanese yen, and the British pound sterling have all employed floating exchange rates as their system of choice for many years.

A currency may have fixed or floating exchange rates. The nation's central bank sets the fixed exchange rate, while the dynamics of supply and demand on the market determine the floating rate.

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