Question

In: Economics

Fixed or Floating Exchange Rate Regime: Debate the relative merits of fixed and floating exchange rate...

Fixed or Floating Exchange Rate Regime:

Debate the relative merits of fixed and floating exchange rate regimes. From the perspective of an international business, which system is the more desirable for an international business?

Solutions

Expert Solution

Fixed exchange rate system is a system of exchange rate which is officially declared and it is fixed by the government. Fixed exchange rate affects the insurance stability, international money market and the foreign exchange market because fixed exchange rate avoids the day to day fluctuations in the foreign exchange market.

Flexible exchange rate on the other side is the exchange rate where the currency value is allowed to really adjust and float as it is determined by the demand for foreign exchange and supply of foreign exchange.

In the international market fixed exchange rate is more suitable in comparison to flexible exchange rate because fixed exchange rate implies the low risk factor and the low uncertainty of the future payments. Fixed exchange market encourages international trade.

The Defective exchange market discourages the venture capital in the international money market. The fixed exchange rate open supported with huge International gold Reserves and it is because of the different currencies urgently directly or indirectly convertible into the gold.

On the other hand, a flexible exchange rate generally causes the instability in the international money market and there are lots of limitations related to the fluctuations in the foreign exchange market.


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