ABSTRACT
The authorities influence only the process through which the rate of exchange reaches its equilibrium level. It is assumed that the authorities leave the foreign exchange market to find its equilibrium through such adjustments in the rate of exchange as the parameters of the supply-and-demand equation require. The conditions for the pressures of supply and demand for foreign currency pushing the rate of exchange towards an equilibrium level are usually given in terms of the elasticities of supply and demand for exports and imports. Equilibrium of supply and demand for foreign exchange does not imply that the balance of trade is in equilibrium. In the general case the numerical values of the elasticities of demand are not the only factors determining the direction in which the balance of trade will move. The elasticities of supply and the balance of trade ratio must also be taken into account.
