Practice question

Question

Directions For Questions
Read the given passage and answer the questions :
In an open economy, there are three key linkages that establish the connection with other countries: the output market, the financial market, and the labor market. The output market allows an economy to trade goods and services with other countries. The financial market enables the buying of foreign assets, and the labor market allows workers and firms to engage across borders, though immigration laws often limit labor movement. These linkages influence the economy through aggregate demand by affecting both imports and exports. Moreover, international transactions require foreign exchange, which is determined by the exchange rate. The exchange rate is the price of one currency in terms of another, which facilitates international trade.
What role does the exchange rate play in an open economy according to the passage?