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Advantages And Disadvantages Of Flexible Exchange Rate System Pdf

advantages and disadvantages of flexible exchange rate system pdf

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International economics. Table of Contents Topic pack - International economics - introduction Terms and definitions Games and activities International Organisations Section 4.

The central bank of a country remains committed at all times to buy and sell its currency at a fixed price. The central bank provides foreign currency needed to finance payments imbalances. What are the main advantages and disadvantages of Fixed Exchange Rates?

Fixed versus Flexible Exchange Rates: The Everlasting Debate

Fixed exchange rate systems were common during the first half of the 20th century. They were strongly favored by governments, since they were mistakenly believed to offer three key advantages. First, they would lower the risk of speculative capital flows that could destabilize the economy. Second, they would introduce greater discipline on domestic policies to avoid inflation. Third, they would remove exchange rate risk and therefore promote international trade.

Skip to search form Skip to main content You are currently offline. Some features of the site may not work correctly. DOI: The choice of an adequate exchange rate regime proves to be a highly sensitive field within which the economic authorities present and confirm themselves. View via Publisher. Save to Library. Create Alert.

What Are the Main Advantages and Disadvantages of Fixed Exchange Rates

A fixed exchange rate occurs when a country keeps the value of its currency at a certain level against another currency. Often countries join a semi-fixed exchange rate, where the currency can fluctuate within a small target level. Avoid currency fluctuations. If the value of currencies fluctuates, significantly this can cause problems for firms engaged in trade. Stability encourages investment. The uncertainty of exchange rate fluctuations can reduce the incentive for firms to invest in export capacity. A fixed exchange rate provides greater certainty and encourages firms to invest.

Let us make an in-depth study of the advantages and disadvantages of the flexible exchange rate system. The chief merit of the freely fluctuating exchange rate is that the BOP disequilibrium gets corrected automatically with the change in exchange rate. If a BOP deficit arises, there would be an excess supply of home currency leading to a fall in exchange rate simply by the market forces of demand and supply. This causes export goods cheaper and import goods dearer. As a result, export tends to rise while imports tend to decline—thereby removing deficit in the BOP account. Similarly, supply in the BOP account means excess demand for home currency and, thus, rise in the exchange rate.


Let us make an in-depth study of the advantages and disadvantages of the flexible exchange rate system. Advantages: (i) Automatic Adjustment in BOP.


Fixed versus Flexible Exchange Rates: The Everlasting Debate

Unlike fixed exchange rates, these currencies float freely, that is, unrestrained by government controls or trade limits. In consequence, floating exchange rates are in continuous fluctuation. Changes in factors such as interest rates, inflation, political stability, trade flows, tourism and speculation, just to name a few, maintain free-floating currencies in continuous movement. This volatility is perceived as a positive aspect for currency speculators, who account for the vast majority of FX market trading.

A fixed exchange rate , sometimes called a pegged exchange rate , is a type of exchange rate regime in which a currency 's value is fixed or pegged by a monetary authority against the value of another currency, a basket of other currencies , or another measure of value, such as gold. There are benefits and risks to using a fixed exchange rate system. A fixed exchange rate is typically used to stabilize the exchange rate of a currency by directly fixing its value in a predetermined ratio to a different, more stable, or more internationally prevalent currency or currencies to which the currency is pegged.

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International economics

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  1. Daniel B.

    12.05.2021 at 19:37
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