Final answer:
The exchange rate system where rates are entirely determined by market supply and demand is the flexible exchange rate system.
Step-by-step explanation:
In an exchange rate system where the exchange rate is determined entirely by the supply and demand for a currency, it is referred to as a flexible exchange rate system. This system is also known as a floating exchange rate. Under this regime, currency values are allowed to fluctuate according to the foreign exchange market, where the rates are shaped by the economic forces of supply and demand without direct government or central bank intervention.
For instance, if American consumers increase their purchases of Mexican products, the demand for Mexican pesos increases, which would lead to an appreciation of the peso against the dollar. Conversely, if Mexican consumers seek more American products, the demand for the dollar rises, and the peso may depreciate. The flexibility of this system allows for adjustments based on market conditions, promoting a natural balance over time.