he agencies involved in determining theexchange rate, including the United States Treasury and the Federal Reserve Bank (theFed). The next section defines and evaluates three different exchange rate systems - thefixed, the floating and the dirty floating. The third section defines trade problems, howthey are affected by the exchange rate, and also how trade is affected by the exchangerate. Finally, this study analyzes foreign cost in terms of the costs of similar goods inforeign markets and how similar costs are possible. II. FOREIGN EXCHANGE RATEDefinition of the Exchange RateThe foreign exchange rate is the price relationship between the currencies of twocountries. How the exchange rate is determined, the agencies involved in determing therate, and different exchange rate systems are outlined throughout this paper. Determining the Exchange RateThe exchange rate is determined by the supply and demand of services and goods tradedbetween countries. Various agencies monitor the rate and intervene when needed, inorder to counter disorderly market conditions. Intervention involves buying dollars andselling foreign currency, coming from the Exchange Stabilization Fund (ESF) of theTreasury, to support the dollars price against another currency. Conversely, the Fed willsell dollars and buy foreign currency to increase the strength of the dollar. The UnitedStates Department of Treasury, the Federal Reserve, and central banks are the primaryagencies that become involved if intervention is needed.1 Although the U.S Treasury hasbeen assigned primary resonsiblity for international financial policy by Congress, theTreasury usually works alongside the Federal Reserve System when deciding tointervene. These interventions do not occur often. Rather, they are implemented as anattempt to shift supply and demand on a long-term basis.Agencies Involved in Determining the Exchange RateThe Federal Reserve Bank and the United States Department o...
