Aggregate supply curve of pounds. Market equilibrium occurs at the intersection of the aggregate demand and supply curves. Fixed exchange rates must be supported by the central bank, and are vulnerable to speculative attacks. Market Demand Curves are aggregates of individual demands. Equivalently, demand curves tell you what price you have to charge in order to sell a given quantity.
Market equilibrium Think of there being only one bank that supplies and demands foreign exchange.
As the price of the pound falls, fewer pounds are supplied, and more are demanded. The price keeps dropping until equilibrium is attained. A drop in the price of a pound is called a depreciation of the pound or an appreciation of the dollar. Put the demand and supply curve on the same graph to determine where they intersect. The point of intersection is the market equilibrium.