Consider a small open economy with a floating exchange rate regime. Assume there are multiple periods t = 0, 1, 2, 3, . . . and each period is a year. All rates (e.g. inflation, output growth, interest rates) are given as annual rates. Which of the following is true about the exchange rate in this economy?
1) The exchange rate is fixed and does not change over time.
2) The exchange rate is determined by the government and can change at any time.
3) The exchange rate is determined by market forces and can fluctuate over time.
4) The exchange rate is not relevant in this economy.