Final answer:
Independent of trade, currency flows set exchange rates, which are the values of currencies relative to each other. The exchange rate regime a country adopts determines how exchange rates are set.
Step-by-step explanation:
Independent of trade, currency flows set exchange rates, which are the values of currencies relative to each other. The exchange rate regime a country adopts determines how exchange rates are set. There are three main exchange rate regimes: floating exchange rates, fixed exchange rates, and a common currency.
A floating exchange rate regime allows the foreign exchange market to determine exchange rates. This means that exchange rates can fluctuate freely based on supply and demand in the market. On the other hand, a fixed exchange rate regime involves government intervention to manage the value of the exchange rate. Governments can peg their currency to another currency or a group of currencies to keep the exchange rate stable. Lastly, a common currency is when a country adopts the currency of another country or group of countries, such as the Eurozone adopting the euro.